WHAT TO DO NOW: The iShares EM Fund (EEM) has dipped decisively below its 25- and 50-day moving averages, which pushes the Cabot Emerging Markets Timer into negative territory. We have one change tonight: We’re moving Weibo (WB) from Buy to Hold.
The recent pullback in the major indexes has been most severe in the Nasdaq, which suggests that the rotation out of growth stocks is substantial. Institutional investors are having to plow through the proposed tax reform bill at high speed and get their bets down at the same time as they’re preparing their portfolios for their year-end school pictures. Thus far, the corrections haven’t been out of scale with previous pullbacks this year, but they have hit our portfolio pretty hard as investors seek a little safety.
The good news is that we don’t have to worry about an ambiguous signal from the Cabot Emerging Markets Timer. The iShares emerging markets ETF (EEM) dropped decisively below its 50-day moving average on Wednesday, which gives us a clear caution signal. EEM has been heading down since November 24, with trading volume increasing to a major spike on November 30. December 1 and 6 weren’t quite as active, but trading volume was above average. The red light from the EM Timer is reinforced by similar action from PowerShares Golden Dragon ETF (PGJ), which has been correcting sharply on heavy volume since November 24. In addition to the persistent pullback in Chinese native shares, a few big holdings (like Taiwan Semi) are being sold off, which has a big effect on EM indexes. There’s also a strong possibility that end-of-year profit taking in some of the very profitable Chinese ADRs that we own may let a little air out of our stocks.
The markets had a good day, which probably felt even better than it was considering its recent behavior. At the close, the Dow was up 71 points (0.29%), the S&P 500 gained 8 points (0.29%) and the Nasdaq led the way with a gain of 36 points (0.54%). The iShares MSCI Emerging Markets ETF (EEM) was up 0.13 points (0.29%) at 45.41.
Alibaba (BABA) corrected into the 160s in August, September, November and December and rebounded each time. But the correction that started on November 27 came on higher volume and involved a higher percentage pullback that any of the previous three. We bought at 102, so we still have a sizable profit cushion. Plus the company news remains positive: Alibaba has formed an alliance with Ford to explore cloud computing, connectivity and the possibility of selling Fords on Tmall. This is just the latest of Alibaba’s joint ventures and acquisitions aimed at artificial intelligence, self-driving cars and battery-powered vehicles, so it’s very much in character for Alibaba. The bottom line is that we’re growing less patient with BABA, and if the stock spends much more time trading in the 160s, we will likely take partial profits and look elsewhere. That’s not our preferred action, as stories don’t come much bigger than Alibaba. But the difference between a stock that’s consolidating or base-building and one that’s stuck is just time. And time is money. For now, we’ll keep BABA rated Hold. HOLD.
Baidu (BIDU) has now had more than six weeks to recover from its October 27 post-earnings gap down from 261 to 239. The stock has been acting like it wants to shake us out, pushing below 230 three times over that time. The stock’s bounce on Tuesday and again today looks hopeful, but volume isn’t particularly strong. There’s a slight possibility that BIDU has formed a very long cup formation that dates back to November 2014, but that’s a long shot. We will hold our position in BIDU (and its small profit) until the stock tells us what to do. HOLD.
We sold half of our position in China Lodging Group (HTHT) in last week’s issue and moved the other half to Hold. Fortunately, November 30 also marked the beginning of the stock’s rebound. HTHT has now advanced for six days in a row, and is up from its September 29 close at 102 to 116. Clearly there are some institutional buyers out there who appreciate the chance to get a great stock at a bargain price. We will stick with our Hold a Half rating until we get a new green light from our market timer, but this situation looks positive. HOLD A HALF.
GDS Holdings (GDS) continues to act like the young stock it is, and for a young stock that’s run from 7 in June to 21 in November, a pullback to 18 isn’t unreasonable. GDS dipped to near 17 in the morning trading session today, but rallied back to trade up fractionally. It hasn’t breached its 50-day moving average, and we’re inclined to give GDS a reasonably long leash. BUY.
Grupo Supervielle (SUPV) has strengthened its basing structure in the 26–27 area that formed support above the stock’s 25-day moving average. SUPV is still a lightly traded issue, but technically it’s acting very well. BUY.
Our half position in Jupai Holdings (JP) was sold in a Special Hotline on November 29 when the stock closed at 18.7 (down from its early November peak at 27. Since that sell, JP has dipped all the way to 15, although today’s remarkable bounce shows that there are still buyers out there. We still like the Jupai story and will keep an interested eye on it as it deals with its November swoon. SOLD.
Sociedad Quimica y Minera (SQM) was sold in a Special Hotline on November 29. SQM tried to form a base at support at 52, but has slipped to 50 this week. SOLD.
It’s now six weeks since TAL Education (TAL) gapped down after its October 26 earnings report and the stock has put in a durable bottom at 27. With half of our profit safely on the books, we’ve been patient with TAL, and it looks like it may be ready to get moving again. The stock has had three days of advances and even nicked the 30 level today in an intraday move. A move above its 50-day moving average (now at 30.8) would be bullish. HOLD A HALF.
Tencent Holdings (TCEHY) followed the herd over the past few weeks, rallying to a new all-time high in late November (advancing too steeply to keep it up, as we warned), then skidding lower on increasing volume. The stock was so far above its moving averages at its November 21 peak that even correcting for nine out of ten days in a row brought it just back to its 50-day moving average. Our profit cushion allowed us to sit tight through this correction and it looks like TCEHY is getting the same boost from today’s rally as the rest of our holdings. We will keep the stock rated Buy, but you should keep new positions small until the chart gets its strength back. BUY.
The correction that Weibo (WB) began on November 21 has put it back to its price level from early September, constituting what may prove to be a three-month basing structure. WB has been trading lower on falling volume, which is also positive from a technical point of view. We like the Weibo story, but the stock is trading perilously close to our 15% loss limit (at 99), so we’re going to move it to Hold and keep it on a tight leash. Our long-term outlook for the stock is positive, but we bought near its November high, and need to keep potential losses under control. HOLD.
YY Inc. (YY) is behaving well. The stock’s retreat from its November highs was just six sessions long and brought it just to its 25-day moving average. The advances yesterday and today mean that YY is holding on to most of its November 15 post-earnings gains. With YY still trading at a great discount to its November highs, this looks like a good buying opportunity. BUY.
ZTO Express (ZTO) is still a relatively young stock (IPO was in October 2016) and has been volatile over most of its trading life. Fortunately, the stock appears to have halted the correction that began on November 13 right at its 50-day moving average. ZTO is tied to Chinese retail (on the delivery end), which is a constructive story. The stock isn’t completely out of the woods, but with next year’s earnings estimates for 32% gains, we think buying a half position still makes sense. BUY A HALF.
