WHAT TO DO NOW: The iShares EM Fund (EEM) gapped up to top its 25- and 50-day moving averages, which returns the Emerging Markets Timer to a positive reading. We are returning our half positions in TAL Education (TAL) and Tencent Holdings (TCEHY) and our full position in Weibo (WB) to Buy ratings and initiating a position in Vipshop Holdings (VIPS).
Markets have staged a stunning turnaround in the past five days, ripping higher and pushing the moving averages of emerging market stocks back into positive territory. The iShares EM Fund (EEM) and the Golden Dragon ETF (PGJ)—both of which had sunk past their 50-day moving averages and were actually closer to their 200-day moving averages than their 50-days’—are suddenly back on top of both their 25- and 50-day averages. From its high close at 52 on January 26, EEM staged a 10.9% correction to its close on February 9. And at one point on February 9, EEM was down 13.5%. Corrections on that scale don’t usually just bounce back in a V-shaped recovery. History suggests that there should be either a retest of lows or a period of sideways trading while the asset builds a new base. We won’t argue with our new buy signal, but we don’t completely trust it either. Extreme volatility is a blade that’s very sharp on both sides.
On the other hand, we don’t argue with our market-timing indicator. If EEM (and PGJ) are on top of their 25- and 50-day moving averages, the intermediate-term trend is up and we have a Buy signal. End of story.
Our portfolio has been enjoying earnings season this week. Vipshop Holdings reported on Monday evening and reacted positively and Weibo delivered on Tuesday morning and rallied well. While we don’t have earnings dates yet for five of our holdings, Tencent Holdings will deliver Q4 and 2017 numbers on March 21.
The Cabot Emerging Markets Timer is positive, with EEM well above its lower (50-day) moving average and right on top of its 25-day. To some extent, this makes the defensive steps we took in last week’s issue look excessive. But following a nine-day correction (and no way to know that the recovery would begin last Friday), those moves were just part of the precautions you have to take if you want to invest in emerging markets. And if you let the market’s subsequent recovery talk you out of those precautions during the next correction, the market will be happy to teach you the value of following the rules.
The markets were mixed for the day, with the major indexes dipping briefly into the red during the morning session, then roaring higher all day to finish with strong gains. At the close, the Dow was up by 307 points (1.23%), the S&P 500 gaining 33 points (1.21%) and the Nasdaq jumping 113 points (1.58%). The iShares MSCI Emerging Markets ETF (EEM) gained 0.99 points (2.03%) to close at 49.69.
Alibaba (BABA), which fell from 205 at the end of January to 173 on February 8, has bounced with the market and is now sitting on its 25-day moving average at around 187. After a mildly disappointing earnings report, that’s plenty of strength to keep our Hold rating. What we’re looking for now is how BABA handles its resistance at 192 that blocked it twice in November and turned it back again in January. We think that’s a technically more important line in the sand than the stock’s brief run to 205 in late January. If BABA can get past that resistance point, we will consider renewing its buy rating. But not until. The news for Alibaba is good, of course, with plenty of aggressive moves both inside and outside China (buying a stake in a chain of home furnishing stores, making a deal to stream Disney movies and announcing plans to buy a 33% stake in Ant Financial). HOLD.
Autohome (ATHM) is back in the black after a nail-biting decline from 86 in January to 72 on February 8. The stock didn’t drop through its 50-day moving average during that correction, which was a good sign. There isn’t a confirmed earnings date, but analysts expect Autohome to deliver on March 1 or 2, with estimates calling for revenue of $269 million and earnings of 69 cents per share. You can nibble here or on any weakness. BUY.
China Lodging Group (HTHT) has been paralleling the market, both with its two-week correction and the rebound that started on February 9. With half of our profit on the books and a huge profit cushion in the remaining half position, there’s no problem with China Lodging’s business plan and execution. The only obstacle for the stock is quarterly earnings, for which we have no set date. We’re content to keep our remaining half rated Hold for now as we await earnings news. HOLD A HALF.
GDS Holdings (GDS) has come through the recent correction in fine shape, dipping just to its 50-day moving average at its lowest point (February 9) and getting back on track quickly. Trading volume has calmed down nicely. No word yet on earnings dates, but investors seem to have adjusted to the news of the company’s secondary stock offering. BUY.
Melco Resorts and Entertainment (MLCO) has been behaving well. The stock has recovered from its so-so earnings report on February 8 and is just about back to our buy price. MLCO has been trading in this range since the middle of December, so we’ll be watching very closely to see whether it will make a run at its short-term resistance at 30. For now, we’ll stay on Hold. HOLD.
Like many of our stocks, Petrobras (PBR) started a bounce from the market’s weakness on February 9. It’s a good sign that PBR found support right at its 25-day moving average and has been riding that average higher for five days. There’s no earnings date yet. BUY A HALF.
TAL Education (TAL) has been showing signs of finally erasing the memory of its October gap down. The stock’s positive gap-up reaction to earnings on January 25 finally filled that October gap and the stock is now within striking distance of its old October high at at 36. We could wait for the market to convince us that its uptrend is for real, but we’re inclined to be a little more aggressive. We’ll return TAL to a Buy rating for a half position. BUY A HALF.
Tencent Holdings (TCEHY) corrected along with the market, falling from 61 on January 26 to 51 on February 8. The stock’s recovery to 58 also followed the market’s footprints. Tencent continues to be a cash-rich company with global ambitions. It has used its bank account to buy stakes in Snap, Activision and Tesla, enlarging its footprint in tech and artificial intelligence. With earnings more than a month away (March 21), we think TCEHY has recovered enough to earn its Buy rating back, although we advise keeping to a half position for now. BUY A HALF.
Vipshop Holdings (VIPS), which gapped up on Tuesday after a well-received earnings report on Monday, gave back a little of its gains to profit taking today. The stock’s post-earnings rally kicked it past its January high on good volume. VIPS looks strong enough to earn a Buy rating. BUY.
Weibo (WB) reported its latest quarter on February 13, with revenue growth of 77% and earnings up by 88%, mostly thanks to the addition of 16 million net new users in Q4. Those numbers easily beat analysts’ expectations. WB ran from 110 to 140 on the news, with today’s pullback to 136 looking like normal skimming off the cream. We will return WB to its Buy rating. BUY.
YY Inc. (YY) has followed the pattern of the market (and most of the other stocks in the portfolio), with a steep correction from late January through February 8 and a nice bounce since then. We’re a little concerned that YY’s bounce hasn’t been as strong as our other holdings and hasn’t pushed the stock to new highs. With no set earnings date (probably in mid-March), we’ll keep our half position in YY rated Hold for now. HOLD A HALF.
