The lack of short-term coverage on China Tech means the rally is a new buy

(Bloomberg) — Chinese technology stocks have seen a massive surge since the country announced its stimulus wave. All signs point to new purchases being the main reason.

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Short positions on American depositary receipts of major companies including Alibaba Group Holding Ltd. were unchanged. and JD.com Inc. and Baidu Inc. significantly in recent days, according to S3 Partners and JPMorgan Chase & Co. If the bears are forced to exit the market on their bets, the rally could gain more momentum.

“The sharp rise in Chinese ADRs over the past week was mostly the result of new buying rather than covering short positions,” JPMorgan Chase & Co. strategists, including Nikolaos Panigirtzoglou, wrote in a note this week. “Short covering in individual stocks appears to have played only a modest role in the rise in Chinese stocks.”

The Hang Seng Tech Index, which tracks 30 Chinese technology companies listed in Hong Kong, has risen more than 45% in less than four weeks, including a record high in the six days to Wednesday. Alibaba, JD.com and food delivery company Meituan were among the companies that saw some of their best trading days in years, as investors went on a buying spree after the Chinese government announced measures to stimulate the troubled domestic economy. The technology gauge rose on Friday for the seventh time in eight days.

While short sellers took market losses, there was no rush to cover bearish bets, Ihor Dusaniwski, S3’s managing director of predictive analytics, wrote in an October 1 report. Short interest for Alibaba, JD.com and Baidu remained at around 2% to 3% of available shares. Dusaniwski warned that if the rally continues, expect a “significant amount” of short covering, which will push stock prices higher.

“The data is surprising because the size of the bounce would normally wipe out short positions several times and force them to cover within a traditional risk monitoring and monitoring framework,” said Han Pyo Liu, fund manager at Maitri Asset Management Pte. “The latest round of stimulus pivot by the Chinese government shows that the leadership has great enthusiasm and intention to turn things around.”

Chinese technology stocks have had a tough few years. While the country’s economy has weakened, a government crackdown on the sector and fierce competition in e-commerce has hurt the results of companies that were previously darlings in the market.

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Short sellers holding on to their positions may be doing so because they are skeptical of the recent rally, according to Sonia Lee, an analyst at MIB Securities Hong Kong Ltd. Chelsea Tam of Morningstar Inc. points out: Consumers are “trading bearish” and the trend remains evident in sectors including e-commerce, travel and food delivery.

However, when it comes to the options market, bulls are alive and well. Bets on gains in a U.S. exchange-traded fund tracking large-cap Chinese stocks are nearer all-time highs than bearish bets after record call trading. Alibaba and JD.com — companies that have seen a recent wave of bullish options trading — are among its largest components.

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Dividends are due Friday

(Adds Hang Seng Tech index move on Friday in third paragraph)

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