WHAT TO DO NOW: The Emerging Markets Timer has shifted to a warning signal, so we are turning more cautious and raising some cash. The markets have taken some of our stocks lower over the past few days, but the portfolio is in pretty good shape overall. Tonight we’re selling MercadoLibre (MELI) and Silicon Motion (SIMO), and putting Baozun (BZUN) and Line Corporation (LN) on Hold.
Market Environment
After heading sideways for a couple of months, U.S. markets have taken a turn for the worse, as the major indexes are all trading below their 50-day moving averages. The S&P 500 has yet to close below its September low of 2,119, and is sitting right at its June resistance. The Nasdaq, which has been the strongest of the three U.S. indexes, is holding up better, but its dip below its 50-day line is also decisive.
Of the two of the longest-running worries for the market, the Presidential election will reach a resolution within a month and the Fed’s long awaited/feared rate-tightening program is likely to finally get going. But weak growth in Europe and Japan, fluctuations in oil prices and uncertainty about the effects of the Brexit vote are keeping investors nervous and ready to react to any news, including Wednesday afternoon’s release of the Fed’s minutes from its September 21 meeting that gave a slight boost to the market.
News that China’s September exports were down by 3.0% and imports were down by 1.9% may be contributing to declines in some of the stocks in our portfolio, but the negative action of the broad U.S. market is just as big a factor. If the action of the past few days is the start of a market pullback, we’re ready to respond. But we will wait until we see what the market does before we abandon ship.
The Cabot Emerging Markets Timer is now negative, as the iShares MSCI Emerging Markets ETF (EEM) is now clearly below its 50-day moving average. But EEM has not dipped below 36 (its September 13 lows), and is still within its trading range of the past two months. We will still have “Buy” ratings on many of our stocks, but you should reduce your risk by buying a smaller than usual dollar amount of any stocks in which you’re taking an initial position.
The markets came under additional selling pressure today, sliding to modest losses. At the close, the Dow fell 45 points (.25%), the S&P dipped 7 points (0.31%) and the Nasdaq dropped 26 points (0.49%). The iShares MSCI Emerging Markets ETF (EEM) fell 33 cents for loss of 0.89%.
Recommended Stocks
Alibaba (BABA) has been down for three days in a row, but is showing some support today, rebounding from its dip below its 50-day moving average. With BABA just 7% off its highs and no bad news, we’ll stick with our Buy rating, thinking it is still likely to be a market leader. Just keep your initial buy at about half of your usual dollar amount and wait for the stock to confirm with a profit of 10% or so before averaging up. BUY.
Baozun (BZUN) has also had three down days, is 14% off its highs, and is testing its 25-day moving average. Since Baozun is particularly sensitive to perceptions about the health of the Chinese economy, we’ll react a little more than usual by putting our half position on Hold. HOLD A HALF.
China Lodging Group (HTHT) looks like it’s having a normal correction, with the stock still within the trading range it has occupied since late August. We’ll stay on Buy, with a reminder that we set 43 as a line in the sand for HTHT; any close below that will likely require quick action. BUY.
Line Corporation (LN) has been public for just three months, so its volatility isn’t unexpected. LN has been in a downtrend since its September 28 pop above 50, and is now down to its 50-day line. We still have a small profit, but a 12-day pullback is nothing to sneeze at. We’ll go to a Hold rating and keep LN on a very short leash. HOLD A HALF.
MercadoLibre (MELI) took a hit today on news that it would execute a secondary stock offering that will favor its shareholders eBay and an eBay subsidiary. The news came out yesterday after the close, and MELI dropped by as much as 8%. Today the stock is fairly flat, moving between 168 and 172. The move has pushed MELI back to its August range and stripped our profit to a scant point. MELI may remain strong, as this move has nothing to do with its fundamentals or its target market, but we will sell the stock to raise a little more cash, as it will take some time to recover and we have stronger holdings. SELL.
Momo Inc. (MOMO) is sticking to the trading range it’s occupied for the last six weeks and is sitting right on top of its 25-day moving average. We’ll remain patient with the stock, as its resistance to the correction in the market is a sign of strength. BUY A HALF.
NetEase (NTES) hit a new all-time high yesterday and carried itself well today. News that the company’s new mobile game, Yin and Yang Shi, is a hit has allowed the stock to ignore the market’s movements. Buy on any correction. BUY.
Silicon Motion (SIMO) formed a double top at 56 in July and September and hasn’t been able to mount a new assault on that resistance. The stock’s action over the last four trading sessions, especially today’s gap down and inability to bounce at all, were the last straw. We will Sell our remaining half position in SIMO and book our tidy profit. SELL.
TAL Education (XRS) made a new all-time high on October 5 and is trading sideways just above that day’s closing price. This is excellent behavior in a jumpy market and confirms our decision to return the stock to a Buy rating. Remember that TAL Education will be reporting earnings on October 27, so keep any new investments smaller than usual. BUY.
Tata Motors (TTM) continues to ride its 50-day moving average higher, despite its pullback from a high just under 45 on September 7. The market didn’t react much to the news three days ago that September’s total sales of commercial and passenger vehicles showed an 8% year-over-year increase. But when markets are moving to the downside, no movement is a good sign. BUY.
Tencent Holdings (TCEHY) ran into resistance at 28 in late September, trading flat until three days ago, when it started a correction that has gained a little speed. TCEHY hasn’t actually touched its 50-day moving average since May, so this is the first correction to approach that support area. We’re not worried, thinking that this would look more like a buying opportunity if the market were more supportive, but it’s still not ideal. We’ll keep the Buy rating, but recommend that you keep any new purchases small. BUY.
Weibo (WB) hasn’t made any progress in October, but it hasn’t given up an inch, either. We’ll keep our recommendation to Buy a Half. BUY A HALF.
Stock | Date Bought | Price Bought | Current Price | Profit | Rating | |
| Alibaba (BABA) | New | 97 | 102 | 6% | Buy | |
| Baozun (BZNU) | 9/9/16 | 14 | 15 | 13% | Hold a Half | |
| China Lodging Group (HTHT) | 3/28/16 | 36 | 45 | 26% | Buy | |
| Line Corp. (LN) | 8/26/16 | 43 | 46 | 7% | Hold a Half | |
| MercadoLibre (MELI) | 8/11/16 | 170 | 168 | -1% | Sell | |
| Momo Inc. (MOMO) | 9/23/16 | 24 | 24 | 2% | Buy a Half | |
| NetEase (NTES) | 6/8/16 | 175 | 262 | 50% | Buy | |
| Silicon Motion (SIMO) | 4/22/16 | 40 | 48 | 18% | Sell | |
| TAL Education (XRS) | 12/18/15 | 48 | 71 | 47% | Buy | |
| Tata Motors (TTM) | 10/7/16 | 42 | 40 | -4% | Buy | |
| Tencent Holdings (TCEHY) | 6/24/16 | 22 | 27 | 20% | Buy | |
| Weibo (WB) | 4/8/16 | 21 | 53 | 154% | Buy a Half |