Baidu: Fundies vs. Chart vs. Short Sellers (BIDU, GOOG)

Baidu, Inc. (NASDAQ: BIDU) is seeing perhaps the largest trading session of its sort.  The notion that Google Inc. (NASDAQ: GOOG) might be out of China almost entirely represents a huge opportunity for the company.  As Baidu is based in Beijing now, it really does not have to worry about the implications of what the Chinese government does or does not do as far as snooping, as far as its domestic policing policies, its censorship, and more.  In fact, Baidu has no real choice in the matter but to exist under whatever rules and regulations the government imposes.  Depending upon which data source you use, Baidu has about three-quarters of Chinese domestic search. If Google leaves, that share is likely to grow much further.  What we wanted to review was the trading implications of this event via a look into the options trading, the short interest and the charts to look for forward insight.

The options trading in the CALLS for January is the most active even with an expiration day being only 2 days out.  Many strikes have traded more than their entire open interest.  As of 11:30 AM EST today we had seen the following options trading in CALL options for the JAN10 CALLS only:

CALL$    Volume    OpInt
390.00    1,529    2,001
400.00    2,682    3,927
410.00    3,586    3,803
420.00    4,443    5,704
430.00    4,453    4,075
440.00    8,269    4,454
450.00    4,892    4,655
460.00    2,112    2,180
470.00    1,292    1,512
480.00    558    1,069
490.00    785    1,048
500.00    1,134    1,018

The short interest data shows a steady decrease in short selling, and we listed the settlement dates, the number of shares short, and the change each month:

• 12/31/2009    2,206,962    -18.98%
• 12/15/2009    2,724,092    -8.78%
• 11/30/2009    2,986,341    -15.71%

After going through the data, it turns out that the short interest in Baidu is the smallest figure now since the 2.147 million listed back on September 30.  Unfortunately the same cannot be said for Google.  Google saw a 33.4% gain in short interest from mid-December to the end of December.  The shares in the short interest were 5.023 million versus 3.765 million shares in mid-month.  In fact, the 5+ million shares short in Google was actually the largest number of shares in the actual short interest tallied up since April 30, 2009.

Where this will start to get very interesting is how pure technicians look at Baidu on the news.  After looking over at Stockcharts.com, there is a severe issue.  Yesterday’s chart on Baidu was starting to become representative of a real break-down.  Yet suddenly today’s action had shares challenging the 52-week highs.  Right before NOON EST the shares were up 12.75% at $435.74 on almost 8,000,000 shares, and that is after an opening price of $441.21 and including almost 1.5 million shares in this morning’s pre-market trading session.  Shares hit as high as $443.20 this morning, yet the 52-week range is $105.00 to $443.25.  Here is a breakdown of the key moving averages to use for comparison:

• 20-day moving average is $412.33
• 50-day moving average is $419.40
• and the 200-day moving average is $338.30

Events like this today become very hard to measure when every metric is telling you a different story.  Google shares are ‘only’ down 1.45% at $582.00, yet you have double-digit gains for Baidu.  The data looking backwards might have led you to believe that some metrics were pricing in very good news, but the charts were telling you a very different event before last night’s news.  The market is trying to tell you one of two issues: China’s web market is just not as profitable as many think and hope, or that this issue will get resolved in fairly short order.

JON C. OGG
January 13, 2010