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China Growth Stocks Slammed As Nasdaq Paces Drop; 3 Reasons To Hold Apple

China growth stocks withered and Wall Street felt more selling pressure Wednesday as concerns over potential tariffs imposed on goods between the U.S. and its trading partners weighed on stocks today. The Nasdaq composite led with 1.5% decline, while the S&P 500 dropped almost 0.9%.

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Volume rose on both exchanges, according to early data. That signaled strong propensity among mutual funds, hedge funds, banks, insurers and the like to anxiously sell equities and raise cash.

Meanwhile, Apple (AAPL) almost resisted the overall decline, edging less than 0.2% lower and outperforming the market. The relative strength has come at an important time. Earlier this week, the iPhone and iPad giant sold off hard and closed beneath its 50-day moving average for the first time in nearly two months.

At 184.16, the megacap tech remains mildly above a 179.04 entry in a narrow and shallow double-bottom base. Therefore, for now, this is one reason why the leading tech stock can still be held by those who bought at the most recent proper buy point.

The Dow Jones industrial average performed relatively better, losing just 0.7%, while the small-cap S&P 600 slid 1.4%. Yet at 1018, the S&P 600's 8.9% advance since Jan. 1 still sharply outperforms a less than 1% gain for the S&P 500.

Breadth was severely negative as losing stocks outmatched winners on the Nasdaq by a 4-1 ratio. On the NYSE, losers beat winners by a 5-2 margin.

Meanwhile, crude oil jumped sharply. U.S. near-term futures gaining 2.6% to $72.38 a barrel. The yield on the benchmark U.S. Treasury yield dropped 6 basis points to 2.82%.

Chinese ADRs performed miserably in the wake of a big sell-off in China mainland equities.

China Investor Angst

Overnight, the Hang Seng benchmark in Hong Kong dropped more than 1.6% and reached its lowest level since early December. At 28,356, the Hang Seng is now down 5.2% year to date.

Sector Leader play Baozun (BZUN) slumped more than 7% and sliced through its 50-day moving average in heavy turnover. The stock gave back all of a solid double-digit gain after breaking out of a seven-week base at 52.43.

Baidu (BIDU) slumped for a fifth day in six sessions, falling more than 3% to 243.10 and closing back below the long-term 200-day moving average.

Since the start of the year, the Chinese search engine has traced a series of higher highs and higher lows, but the severe choppiness has made it difficult for investors who have tried to buy Baidu shares on a breakout.

Baidu announced plans to buy back as much as $1 billion worth of its common shares. The company's market value is nearly $85 billion.

Plenty of other Chinese growth stocks got hammered.

Autohome (ATHM), a former Leaderboard name, sharply undercut its 50-day moving average and issued a key defensive sell signal. Shares fell nearly 8% to 97.51 in volume that grew 169% above average.

The 50-day moving average, painted as a red line in IBD's daily charts, had contained no fewer than five pullbacks by Autohome since early February.

Therefore, Wednesday's big cut of the 50-day line showed a bearish change in character in the leading stock.

The online marketing firm for the Chinese vehicle market had vaulted out of a double-bottom base at 66.55 on Jan. 2. It ultimately rallied 79% before sliding into its current price correction.

Two More Reasons Not To Sell Apple

Apple has not made much price progress compared with 2017, when it cleared a cup with handle at 118.12 on Jan. 6 of that year. That cup with handle was not only first stage, but also served as a bottoming-base chart pattern after the stock's lengthy decline. Shares have risen 64% since then.

However, the stock has continued to trace a slow yet steady uptrend while finding buying support at the key 10- and 40-week moving averages.

Plus, the fundamental picture still looks bright. Earnings in the June-ending fiscal third quarter are forecast to grow 31% to $2.18 a share. That would mark acceleration from EPS gains of 2%, 11%, 18%, 24%, 16% and 30% in the prior six quarters.

On Wednesday, Reuters reported that Apple and arch rival Samsung of South Korea settled a years-long technology patent infringement suit in a U.S. district court in Northern California. Terms were not disclosed in the court filing.

Also, earlier this week, the Economic Times of India reported that Apple plans to boost production of certain iPhone models in the South Asian country in a bid to lower costs.

According to IBD Stock Checkup, Apple's SMR Rating has risen to a top-drawer A grade on a scale of A to E. This proprietary rating focuses on sales growth, profit margins, and return on equity.

This Breakout Failed

A handful of companies staged breakouts, but their finishes lacked oomph.

Kemet (KEM), part of the IBD 50, attempted a breakout from a long, deep cup with handle that showed a 25.79 buy point. Shares got as high as a 3.7% gain to 26.33 before cooling off and falling 15 cents to 25.23. Volume jumped 54% above usual levels.

The drop within Kemet's cup base, a 49.8% slide from a 27.35 high to 13.73 at the bottom, is way more than the acceptable limit of 33% to 35% corrections in a normal cup with handle.

However, keep in mind that the stock ramped up from as low as 1.26 in early 2016, a 2,070% gain until it carved the latest base. In some cases, a leading stock can build such a deep base, break out properly, and keep running to new highs.

Outstanding fundamentals going forward usually factor into the story.

Kemet, an expert in capacitors for electronics manufacturers, has grown its earnings per share 44%, 175%, 250%, 450%, 246%, 373% and 221% vs. year-ago levels in the past seven quarters.

That kind of blistering growth is not likely to continue. But the Street sees earnings in the fiscal first-quarter ending in June rising a healthy 39% to 46 cents a share.

Despite Wednesday's negative reversal, Kemet hasn't yet triggered the golden rule of investing.

(Please follow Saito-Chung on Twitter at @IBD_DChung for more commentary on growth stocks, buy points, breakouts, sell signals, and financial markets.)

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