WHAT TO DO NOW: The Emerging Markets Timer is now flashing a new buy signal, as the iShares Emerging Markets Fund (EEM) has risen above both its 25- and 50-day moving averages and the lower (25-day) has turned up. Our only portfolio move today is to return TAL Education (TAL) to a Buy rating.
Market Environment
A quick look at the three major U.S. stock market indexes will show you that the little dip in the last few trading days of 2016 was just a fake-out. The major indexes are all still in flat patterns since the middle of December, which is a normal consolidation of their November/December gains. All of these indexes are trading above their respective 25- and 50-day moving averages, which spells out a buy signal for U.S. growth stocks.
The major moves in the market since the Presidential election have stayed consistent: lots of banks, commodities and infrastructure stocks have done well. But the move that interests us most is the lift in emerging market stocks since December 23 and in Chinese ADRs since January 3. That’s not long enough to confirm a bull market, but it’s certainly a good sign that investors are finding bargains and stories to like in stocks outside the U.S.
We have a new buy signal from the Cabot Emerging Markets Timer and we’re responding by returning one of our stocks to a Buy rating. But as we always point out, new buy signals are fragile and vulnerable to quick reversals. If the buy signal confirms itself by driving up prices, we will certainly increase our exposure quickly. We raised plenty of cash in the portfolio during the last couple of months, and we have plenty of ammunition if the buyers stay in charge.
Markets dipped during the morning session, then rallied in the afternoon, but only the Nasdaq managed to end the day in positive territory. At the close, the Dow was down 45 points (0.22%), the S&P 500 fell 2 points (0.08%) and the Nasdaq gained 11 points (0.20%). The iShares MSCI Emerging Markets ETF (EEM) outgained the major indexes, rising 0.41 points, which is a gain of 1.15%.
Recommended Stocks
BeiGene (BGNE) put in a low at 26 on December 8, and tagged 32 on January 4. BGNE is a volatile issue, dipping as low as 30 today but strengthening during the day. We like this story, but don’t quite trust the stock’s action yet. We will stick with a Watch rating until we see a better setup. WATCH.
After a sharp five-day dip in the middle of December to its September/October support level, China Lodging Group (HTHT) ended the year with a five-day rally, including a healthy spike in volume on the last day of 2016. The stock has pulled back a little since New Year’s, but is sitting above its 50-day moving average. That pullback is a little vexing, as Chinese ADRs in general have been quite strong this week. We will stay on Buy, with a mental stop at 46. BUY.
Our remaining one-third position in NetEase (NTES) has made good progress on rising volume during the three days since New Year’s. Performance like this makes it look like the stock’s November pullback and December bottom are about played out. If NTES continues to strengthen, we may consider upgrading it again. For now, we will hold our shares. HOLD.
Pampa Energia (PAM) corrected during much of December, but staged a rally during the last three trading sessions of 2016 and even gapped up on January 3. These advances have returned the stock to within less than a point of where we bought it on December 9, which is encouraging. There may be some lingering questions about the company’s purchase of Petrobras Argentina, but the verdict from investors seems positive. A breakout above November resistance at 37 will likely see us moving back to a Buy rating, but for now, we’ll hold our half position. HOLD A HALF.
TAL Education (TAL) has rallied enthusiastically for three days, taking aim at its November high at 78. There may be a little overhead pressure from investors who bought higher in October and November, but that could melt away if Chinese stocks start to attract attention again. We will return TAL to a Buy rating. BUY.
Vale (VALE) staged a minor pullback in December that found support at 7.6. VALE looks to be getting a boost from its rising 50-day moving average and is trading higher on slightly increased volume. We note that many commodities stocks have been gaining support, and will keep our rating at Buy a Half. BUY A HALF.
VanEck Vectors Russia ETF (RSX) was chopping around when we bought it in December, but finished the month with a rally and actually gapped up on January 3. The January 3 close was the ETF’s highest since September 2014. The political story behind this rebound may have legs … and it may not. For now, we’re happy to keep it rated Buy a Half. BUY A HALF.
ZTO Express (ZTO) has also made a little run to begin the year, bouncing from its December 30 close just above 12 to near 13. ZTO has been through a substantial post-IPO correction since it closed above 18 on its first day of trading on October 27. We would like to see the stock put in a convincing base around here and get moving. We’ll keep it rated Watch for now. WATCH.
