The Chinese Gaming Sector

We’ve profiled two stocks on this page. We endorsed Netease.com (NTES) and suggested avoiding Perfect World (PWRD). But the sector also contains Shanda Interactive Entertainment (SNDA) and recent Sohu.com spin off Changyou.com (CYOU).

Growth investors looking to get the most mileage out of a rally in a hot sector need to be attentive to the leader. That’s generally the stock that breaks out to new highs first and just keeps running. It’s the stock that frustrates the growing army of buyers that wait for a comfortable pullback. In the current rally that stock is NTES.

SNDA and CYOU have had difficulty making new highs, making them laggards. Even if they move higher later in the rally they are unlikely to post the gains that NTES will.

PWRD is a more difficult read. The weekly chart clearly shows a stock breaking to new highs out of a consolidation on volume. But the daily indicates a stock that has churned on volume at its highs. We suggested avoiding this stock originally because its pattern is sloppy, which is usually not supportive of a smooth, sustained advance. In our view the need to pursue PWRD is a moot issue in any event when NTES is the clear leader and deserving of your investment money on a pullback to the 10 MA (or 20 MA later in the rally when it inevitably occurs).

Of course the true Chinese Internet monster, beyond just gaming, is Baidu (BIDU), which we also profiled previously and suggested as an investment. Chinese stocks are leading the market and BIDU seems to be leading the Chinese stocks, up better than 20% to this morning’s peak from its break out point where we recommended it nine days ago. As with NTES, this is a buy on the right pull back.