The Chinese Stock Few Like

07/13/2009 1:10 pm EST

Focus: OPTIONS

Andrea Kramer

Associate Editor, Schaeffer's Investment Research, Inc.

Andrea Kramer of Schaeffer's Research sees a quick premium for China Life Insurance based on a bullish stock chart and a herd of Wall Street skeptics.   

According to recent data from the Institute of International Finance, China's gross domestic product (GDP) is expected to grow by 7.5% in 2009, and 9% in 2010, [a recent] Motley Fool [column] notes. What's more, the Shanghai Composite Index has skyrocketed more than 50% so far this year, with a bevy of big-cap Chinese stocks gaining ground. However, the columnist cautions that "just because there's growth, that doesn't mean you should buy everything in sight."

More specifically, the Fool names China Life Insurance (NYSE: LFC) as one of the Chinese stocks to avoid, even though it may look "so darn tempting." Warning that the security could "be lethal to your long-term financial health," the article highlights the firm's poor equity investments last year, noting that a 4.7% loss ate substantially into the company's overall return on investment. The column concludes by offering a few words of wisdom to traders considering investing in the Far East: "Make sure you invest like it's 2009, and stay away from companies that don't have a good chance of offering growth that you can reasonably predict."

Contrarian Takeaway:
Technically speaking, since grazing the $35 level in November 2008, the shares of LFC have added roughly 70% along support from their 50-month moving average. In fact, the stock is now approaching the $60 level, and is poised to close its second straight month atop former double-barreled resistance at its 10-month and 20-month trendlines for the first time since late 2007.
 
Despite the security's strength on the charts, however, the Street remains skeptical of LFC. The stock's Schaeffer's put/call open interest ratio (SOIR) currently rests at 1.36, indicating that puts outnumber their bullish brethren among near-term options. What's more, the equity's SOIR stands only four percentage points from an annual pessimistic peak. Plus, during the past couple of weeks on the International Securities Exchange, speculators have bought to open nearly three times more puts than calls on LFC. Compared to similar readings taken during the past year, the stock's 10-day put/call volume ratio is only five percentage points shy of its own bearish climax.

Furthermore, short interest on LFC soared by 17.5% during the most recent reporting period, underscoring the bearish bias on the Street. Meanwhile, Thomson Reuters pegs the average 12-month price target on the stock at only $52.75, representing a more-than-six-point discount to LFC's [Thursday] high of $59.22.

Should the shares of the insurance issue extend their recent quest for new highs, the skeptics could get spooked. A reversal in sentiment among option traders, a short-covering spree, or a fresh wave of price-target boosts could all act as potential catalysts higher in the near term.

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