We Tried to Warn You By Michael Salvatore, Editor, TradeSmith Daily In This Digest: - The China stimulus trade unravels (for now)…
- Here’s how our stock-picking genius rates the top Chinese stocks…
- A massive divergence between fundamentals and technicals…
- Bitcoin’s consolidation looks like a long-term buy…
Chinese stocks were destined for correction… And that’s precisely what we got on Tuesday and Wednesday this week. Check out the chart: 
The iShares China Large Cap ETF (FXI) fell more than 10% from Tuesday to Wednesday, after we warned you that the market was due for a plunge. As we wrote then: An RSI of 85 is already a high level, and stocks of any kind don’t tend to stay so overbought for long. But we’re also seeing a divergence between the price and the RSI. While FXI has made new highs, the RSI has made a lower high. That’s a big sign of an impending breakdown. My message for any holders of Chinese stocks is twofold. - Congratulations… time to celebrate.
- Turn at least some of that equity into cash, and you’ll be glad you did.
We then demonstrated how the only four other times Chinese stocks have reached such nosebleed overbought conditions, they fell 75% of the time, with an average 21-day loss of 3.8%. That appears to be what’s happening this go around. FXI’s RSI has plunged back down to 60, near neutral. And it’s below the RSI-based moving average – a sell signal. To be clear, a lot of this is simple profit-taking. China was madly overbought, and the letdown of a press conference from the National Development and Reform Commission (NDRC) – where investors expected to hear more details about the stimulus program and forward guidance – was the perfect reason to sell. But keep a close eye on China. Though volatile, we cannot ignore the sheer grandiosity of the stimulus program in place and how policymakers might respond to the recent market moves. It’s the largest such effort to stimulate an economy since COVID, and we all know what happened then. It should also be noted that even with the recent correction, Chinese stocks are well ahead of U.S. stocks for the year – up more than 41% against the S&P 500’s still very respectable 22%: 
Close to the start of the year, we noted how Chinese stocks were acting as a drag on the global stock market’s performance against the U.S. That’s no longer the case. And despite the massive volatility, the trend in China has changed. One would do well to hold quality Chinese stocks in their portfolio… And a great way to tell which ones are worth buying is Jason Bodner’s Quantum Score. Jason is our resident stock-picking expert here at TradeSmith. Years ago, he built a special algorithm that not only singles out companies with the top growth prospects, but also screens for the stocks seeing unusually strong capital flows. These capital flows are so large, and hold such a unique pattern, that Jason’s years of experience as a Wall Street dealmaker tells him they’re likely from major institutions. Big money flows are a strong predictor of future returns, and he’s done well for his subscribers following them. Jason’s Quantum Edge Pro portfolio over the last 12 months has given readers 15 trades, 12 of which are open winners in his model portfolio for an average gain of 11.5%. Among those are gains of more than 17% since the end of August, 30% since April, and one blockbuster win in SMCI – recommended a year ago, and partially closed for a risk-free open return of 158% as of this writing. And that’s just over the last year. Our backtesting shows that, over the past 30 years, Jason’s Quantum Edge system would have beaten the S&P 500 by 7-to-1. 
That’s why today I want to show you the meat and potatoes of Jason’s strategy – the Quantum Score. Using a 0-100 scale, this score tells you instantly if a stock has a strong technical and fundamental story, and whether it’s a likely Big Money target. I took the top 5 U.S.-listed Chinese stocks by market cap and ran each of them through Jason’s system. Here’s what it turned up… 
Of the five top Chinese stocks by market cap, only two of them earn a “passing” grade on Jason’s system. Interestingly, the top two also returned the same score. A score of 60 or above puts a stock in Jason’s buy zone. That buy zone tops out at around 85, when stocks start to become a little too hot to touch. That means BABA and JD are just barely in Jason’s buy zone, with the Technical factor being a big reason. The other three, NTES, BIDU, and LI don’t quite hold up. And a big reason why is, despite the recent surge, these three names have all lagged in recent months. 
So if you’re looking for stocks to buy on the recent pullback in China, keep your eye trained on those that rank highly on Jason’s system. Speaking of Jason’s system, look at this bizarre anomaly… Yesterday, contributing editor Lucas Downey wrote you about cosmetics company e.l.f. Beauty (ELF). This stock is a truly strange case, because it’s lost nearly half its value in just a few months. I looked into this stock a bit more, and the reason why it’s lost so much value, so fast, seems to be a matter of misplaced expectations and, consequently, a rapid repricing. In 2023, ELF provided full year guidance for growth rates of between 22% and 24%. However, they wound up more than tripling those figures, with growth rates of 77%. This year, investors expected its growth expectations would grow by some similar extent. Instead, ELF management bumped them up to a range of 25% and 27%. These relatively disappointing expectations are seemingly what has driven the stock lower, because ELF has still outpaced expectations on revenue and earnings per share. In fact, it hasn’t failed to beat earnings expectations since its February 2021 report, the only miss in the company’s history. All this is to say, this is a fundamentally strong company that’s a victim of investors getting over their skis on growth expectations. And as Lucas pointed out, valuations this low tend to precede major upswings. But let’s also look at Jason’s Quantum Score for some insights: 
Fascinatingly, ELF holds a bright green Fundamental score of 83.4, one of the highest I’ve seen, and simultaneously a dog of a Technical score, at 26.5. This reflects the recent downside momentum being so poor. And while it’s not currently rated a buy, the score above illustrates just how dislocated the fundamentals are from the technicals on this stock. It’s one to watch closely… Get ready for bitcoin to surprise you in 2025… I’ll admit, I was excited for bitcoin this year. And while it did chart a new high, it hasn’t really done much since. I think that changes next year. Here’s why… Let’s first take a look at this long-term chart of bitcoin: 
What I’ve done here is chart the amount of time it’s taken since the halving (when incoming bitcoin supply reduces by half, part of its programming) for bitcoin to reach the top of its “cycle.” After the first halving, it topped out 343 days later. After the next cycle, 518 days later. Then 546 days later from the cycle between 2020 and 2021. What we can see is that the cycles between halvings and tops are getting longer. It isn’t a large sample size, but we know they’ve grown by an average 103 days each cycle. Understand, I’m not claiming the next cycle will wind up precisely this long.. But if we add 103 days to the length of the last cycle, 546 days, we get 649 days (shown as 651 above given that it’s a weekly chart.) As you can see, that takes us just a hair into 2026. And that means we potentially have a lot of time left to go in this bitcoin cycle… And don’t forget, the macro picture is starting to support higher prices. Remember, the advent of lower interest rates and other stimulus around the world is a sign that we should see higher asset prices in the months and years to come. That’s what tends to follow accommodative monetary policy when the economy is strong. As for how high bitcoin could go? I still think we’ll see it eclipse six figures, and likely get close to if not above $200,000 per coin. That would be about a triple from today’s prices, actually a modest increase compared to performance in last cycles. If you don’t have any bitcoin exposure, it’s never been easier to do. If you’re not up for buying the genuine article, check out this piece we wrote when the first bitcoin ETFs launched (but do your homework before you buy anything – some numbers may have changed.) The way I see it, it’s an essential part of everyone’s portfolio for its disinflationary nature, not to mention its history of posting surprisingly strong performance every few years. To your health and wealth,  Michael Salvatore
Editor, TradeSmith Daily | 
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