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Cabot Emerging Markets Investor Bi-weekly Update

The iShares EM Fund is holding up well, staying comfortably above its 25-day moving average, so our Buy signal remains in place. While our stocks are holding up well, there’s a lot of sideways movement in the portfolio. We have no changes to the portfolio tonight.

WHAT TO DO NOW: The iShares EM Fund is holding up well, staying comfortably above its 25-day moving average, so our Buy signal remains in place. While our stocks are holding up well, there’s a lot of sideways movement in the portfolio. We have no changes to the portfolio tonight.

There has been a ton of disturbing news, including Hurricane Harvey and its aftermath, North Korean missiles and worries about political loose cannons, but the market doesn’t appear to be paying much attention. Maybe it’s because it’s August and maybe it’s crisis fatigue. But whatever is supporting the market is working, at least in keeping the indexes on track. The action among leading growth stocks is a little less constructive, with few real breakouts that achieve follow-through to the upside. Presumably this will change when the big money managers come back from vacation in September, but that’s just a guess based on past years. We’ll see.

The Cabot Emerging Markets Timer remains positive, as iShares EM Fund (EEM) has had an interesting month. The ETF took a hit on August 9 and 10, as did all of the major indexes. That pullback caused EEM to dip below its 25-day moving average, but it was never in danger of crashing through the 50-day. EEM got back on top of its 25-day on August 21 and has been sailing well clear of its averages since then. The Golden Dragon (PGJ), which tracks Chinese ADRs specifically, has shown significantly more volatility, even dipping below its 50-day moving average on Tuesday. The increasing swings in Chinese issues is a concern, but not enough to alter our overall bullish stance.

Markets enjoyed modest gains day, with the Nasdaq leading growth stocks higher and all three major indexes finishing above their 25-day moving averages. At the close, the Dow was up 60 points (0.27%), the S&P 500 gained 14 points (0.57%) and the Nasdaq rose 60 points (0.95%). The iShares MSCI Emerging Markets ETF (EEM) gained 0.05 points (0.11%), to finish at 44.81.

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Alibaba (BABA), which started a roller-coaster dip last Thursday, has bounced back without ever contacting its 25-day moving average. The stock has fully emerged as the favorite Chinese stock of many analysts and institutional investors, and sentiment is high as a kite following a triumphant earnings report, optimistic guidance and many raised price targets. The company announced this week that it would emulate Amazon by licensing more than 10,000 brick-and-mortar stores in China during the current fiscal year. Despite all the attention, BABA still trades at a reasonable 44 P/E. We’ll stay on Buy. BUY.

Autohome (ATHM) has been trading sideways for a couple of weeks, which is entirely acceptable after a stock has jumped from 49 as August began to near 64 today. ATHM’s consolidation may provide a lower-risk entry point; you can look to start a position on a dip toward 62. If the market holds up, ATHM should head higher after a bit of profit-taking and portfolio adjustment by the whales. BUY.

After its dramatic rally from the middle of June and gap up in late July, Baidu (BIDU) has spent the month of August holding on tight to its gains. With today’s rally (for a third day in a row), BIDU is back on top of its rapidly rising 25-day moving average and is sitting in the top third of its post-gap trading range. BIDU isn’t likely to challenge for leadership among Chinese ADRs, but a buy as close to 220 as possible is a good risk/reward bet. BUY

China Lodging Group (HTHT) consolidated at 80 from May 11 through July 14, then ran higher from mid-July, reaching as high as 118 on August 22. The stock has also staged three multi-day corrections during August, but is still atop its 25-day moving average by a comfortable margin. In short, while HTHT is volatile, it is also a powerful growth stock that has been trending up for years. We really like the company’s strategy of gobbling up smaller competitors and using its own management to impose corporate standards on these new acquisitions. It’s a cheap way to grow, and it’s expected to produce 52% earnings growth this year. There’s bound to be a major correction sometime, but selling pressures have been completely normal so far. Look for a pullback of a few points to get in. BUY.

HDFC Bank (HDB) has been in a strong uptrend since January, with a flat patch in June and a meaningful pullback earlier this month to keep things from overheating. The continuing growth of the Indian economy is a big story that gives us confidence in HDFC Bank’s future. Since finishing its seven-day correction on August 11, HDB has been quietly strengthening. We will keep HDB rated Buy. BUY.

NetEase (NTES) has bounced for a few days, but the lingering effects of its August 10 gap down on big volume will likely keep it from assuming any kind of leadership. We sold the stock in last week’s issue. If you haven’t sold yet, this bounce is a good opportunity for a more advantageous sell. SOLD.

Sociedad Quimica y Minera (SQM) caught fire in July after a five-week correction that pulled the stock back to flat for the year. But SQM’s longer-term performance has been excellent, and its July breakout run is in good shape, with its recent minor pullback from 48 to 46 giving its 25-day moving average a chance to catch up. We like the story of a stable fertilizer business getting increasing revenue from sales of lithium for the batteries that are powering more cars, devices and (potentially) homes. BUY A HALF.

TAL Education (TAL) got everyone’s attention with its recent pullback from 32 to 27 on heavy volume. But the stock bounced nicely off its 25-day moving average and is now safely back above 30. TAL has been a very successful holding for us since we bought it in late 2015, and we’re well aware that it’s not in the early innings of its overall advance. But there’s no threat on the horizon, so we will keep the stock rated Buy a Half, with a recommendation to look for pullbacks and start small with initial positions. BUY A HALF.

Tencent Holdings (TCEHY) has had a volatile August, with a slip from 42 to 39 on August 10 and 11 followed by a pop to a new all-time high on August 16. But the bottom line is that TCEHY is now trading at exactly the same price it was on August 8, which makes this a simple sideways consolidation, just like many of our other holdings. TCEHY is a headline stock that is often discussed in the same online articles as other tech giants like Alibaba, Apple and Alphabet. The outlook for the company (and the stock) is excellent, and you can buy on any pullback of a point or so. BUY.

YY Inc. (YY) is recovering nicely from the reaction to its large secondary stock offering. Support at 70 looks durable and the stock popped back to its 25-day moving average today. That’s not to say that the stock is ready to run again, as YY has been flat since late July. But there doesn’t appear to be much danger, either. We’ll keep the stock rated Hold until we see evidence that investors are ready to start buying again. HOLD.