We know from history that on-the-line ad rates can be a quickly withering thing in economic downturns. While people don’t surf the world wide web less during economic and/or financial market shocks (which is what China could be headed for), we know that advertisers cut their budgets during these periods. While many perceive Chinese financial markets and many company’s financials to be opaque, I think it is safe to say that the Chinese search giant Baidu (BIDU) is the real deal (I have personally met with the company in Beijing and can attest to it). But that has not spared the company’s adr from dramatic year to date losses of 17% and 25% declines from the 52 week and all time highs made in November. With this morning’s break to new 52 week lows, the stock round-tripped its entire move. For all intents and purposes, the stock held where it was supposed to at $180:
On a very short term basis the stock’s intra-day reversal could cause a re-test of what could be formidable technical resistance at $200:
As expected options prices have shot up with the stock’s recent nosedive, but still below the 52 week highs made last October:
BIDU has missed estimates in their last two earnings events, and the stock has declined the following day 8.5% and 4.5% in late April and Feb respectively. Earnings and sales are decelerating, but the stock is trading very cheap on forward estimates. The keyword there is forward. Any contrarian bullish plays should probably try to avoid the company’s Q2 report expected in late July.
If I were to play for a follow through I would expect for it to come sooner than later, and possibly fail at that level. Also options prices make long premium directional trades challenging, so I might consider selling a short dated put spread following a steep panic decline. That strategy takes advantage of both long deltas as well as selling high implied volatility. Of course, the risk is a serious crash in Chinese dotcoms. And that’s entirely possible, which is why I would look to define my risk.