WHAT TO DO NOW: The Emerging Markets Timer is still negative, although investors are edging back into the sector, moving the MSCI Emerging Markets Fund (EEM) higher over the past week. Our only portfolio move today is to buy a half position in Vale (VALE) bringing the portfolio to 40% invested.
Market Environment
U.S. markets scored a remarkable coup this week as four major stock indexes—the Dow, the S&P 500, the Nasdaq and the Russell 2000—hit new all-time highs on the same day. With the U.S. presidential election over and a solid consensus that the Federal Reserve will raise interest rates by a quarter-point in December, it looks like investors are celebrating the removal of the last big uncertainty that haunted them through much of 2016. Housing starts in the U.S. have spiked, commodities are rebounding and unemployment numbers are very constructive. In short, U.S. equities appear to have a clear path ahead.
The situation in emerging markets is improving, as the iShares Emerging Markets Fund (EEM), which bottomed at 34 on November 14 (down from 38 on October 24) has quietly crawled back to 35. Investors’ appetite for emerging markets equities is on the rebound, though the intermediate-term trend remains down.
We responded to the steep three-week decline in emerging market stocks by drastically reducing our exposure. We took profits in some long-term holdings and cut losses short in others. We recognize that in such a volatile environment, some stocks we sold may pull out of their dives and start advancing again. One example is Weibo (WB), the last of our former holdings to report its quarterly results. Following the company’s Q3 report on Monday, WB has enjoyed a rally on rising volume. But we never regret following the rules that led us to sell; we can always find places to put our money to work once our market timing indicator flashes the green light again. If we hadn’t taken action and WB had continued its correction, we would have had a tough time making up the loss.
Markets have been trading mixed during today’s holiday-shortened session. At mid-day, the Dow is up slightly and the Nasdaq and S&P 500 are down slightly. The iShares MSCI Emerging Markets ETF (EEM) was down about a half a point, which is a correction of more than 1%.
Recommended Stocks
Alibaba (BABA) didn’t react well to earnings, and slid sharply into the emerging markets bottom on November 14, when we sold it in a Special Bulletin. The stock rebounded for a couple of days after that, but has slipped lower again since last Friday. It looks like a good sell despite the excellent long-term prospects for Alibaba. SOLD.
BeiGene (BGNE) is living up to its reputation for volatility. After a big rebound from the November 14 bottom, the stock has pulled back again, probably as a result of the secondary stock offering announced last week. It looks like support is firm at 31, the same level that supported the stock earlier this month. We’re happy to keep it on the Watch list for now. WATCH.
While China Lodging Group (HTHT) dipped in late October and rallied in early November, its net progress since late August has been pretty much zero. But in a very soft environment for emerging markets stocks, that kind of steadiness becomes a virtue. We bought at 36 in March, so we still have a profit cushion to work with. We expect HTHT’s steadiness to produce further gains when investors’ appetite for Chinese stocks returns, so we’ll keep it on Buy. BUY.
We recommended buying a half position in Melco Crown Entertainment (MPEL) in last week’s issue, and the stock has cooperated nicely, joining several U.S. casino stocks in gaining support from news of increasing gambling revenue in Macau. You can take a half position on any dip below 19. BUY A HALF.
Momo Inc. (MOMO) was sold in a Special Bulletin on November 14, and hasn’t done anything since then to make us regret the decision. SOLD.
We sold a third of our position in NetEase (NTES) in early November and another third in the November 14 Special Bulletin. And after bottoming with the market on November 14, NTES has bounced higher by 10 points and is trading calmly sideways. The company’s game business seems to be in fine shape, and with our position solidly profitable, we’re happy to hold our remaining third to see what happens. HOLD.
Petrobras (PBR) triggered out loss limit and was sold in the November 14 Special Bulletin. SOLD.
We let our profit cushion keep us in our position in TAL Education (XRS) and the move has paid off. The stock corrected sharply into the November 14 low point but has staged a six-day rally since then. XRS is now back atop its 25-day moving average and is heading higher on calm volume. We’ll stay on Buy. BUY.
We sold half of our position in Tencent Holdings (TCEHY) in a Special Bulletin on November 14 after the stock, which had been declining since early October, gapped down on November 11. TCEHY reported its Q3 results on November 16, but the reaction so far has been flat. We still have a profit cushion in TCEHY, and will be patient with our remaining holdings. HOLD A HALF.
Vale (VALE), which was added as a Watch in our November 17 issue, surged higher last Friday and continued its rally through Monday and Tuesday. The move pushed VALE to its highest level since May 2015. VALE is still well below its January 2011 price of 37 and the global recovery in commodity stocks appears sound. If you have plenty of cash on the sidelines, you can take a nibble here. BUY A HALF.
Weibo (WB) was sold in a Special Bulletin on November 14, following a five-week decline from 56 on October 10 to 42 on November 14. We originally bought WB on april 8 at 21, so our selling of our remaining position realized a 100% profit. The stock climbed on big volume on Tuesday after a well-received earnings report after the close on Monday. If WB continues to appreciate, we will consider buying it again. But for now, with the momentum of the market not fully on our side, we will just enjoy our profits. SOLD.
We noted today that Jacob Mintz, Chief Analyst for Cabot Options Trader, floated an idea for a covered call option for holders of WB. Here are the details of that option move.
Buy Weibo (WB) Stock at 49, Sell January 50 Calls for $3.50
Static Return: 7.69%
Breakeven: 45.50
Covered Call Return (if assigned): 9.89%
