WHAT TO DO NOW: The iShares EM Fund (EEM) has dropped decisively below its 25- and 50-day moving averages, which returns the Emerging Markets Timer to a negative reading. We take the Timer’s advice seriously, so we are shifting a couple of stocks to Hold ratings, but because the damage to the portfolio thus far has been minimal, we don’t have any sells tonight. But watch this space, because with six quarterly/annual reports still to come, we may have plenty of decisions to make soon. Tonight we are moving Autohome (ATHM) and GDS Holdings (GDS) to Hold.
After executing a V-shaped selloff and rebound in late January and early February, the market started a sharp correction on Tuesday that pulled the iShares EM Fund (EEM) below its lower (50-day) moving average, slapping a STOP sign over our Buy signal. The Golden Dragon ETF (PGJ), which had been holding out, also slipped below both its 25- and 50-day moving averages, so the market is back in the penalty box. Fresh warnings from the Cabot Emerging Market Timer are every bit as prone to reversals upward as fresh Buy signals, but we won’t second-guess the indicator.
The apparent culprit in the correction is the new Federal Reserve chair, Jerome Powell. He observed that the U.S. economy is stronger (and inflation likely to rise faster) than predicted, which might lead the Fed to raise interest rates more quickly than previously thought. The effect on the stock market was quick and heavy, and sent February returns into the red, the first losing month for stocks after 10 positive months. In the final analysis, it doesn’t matter why the correction happened, but there is some comfort in being able to pin a tail on the cause.
While earnings season is tailing off for U.S. stocks, our portfolio still has five stocks with reporting dates in March and one—Petrobras—with no announced date. Here are the dates we have: YY.com on March 5 after the close, AutoHome on March 7 before the open, GDS Holdings on March 13 before the open, China Lodging on March 13 after the close and Tencent Holdings before the open on March 21. That’s a big chunk of earnings exposure for a portfolio with 11 holdings, and we’ll need to be on our toes to get through unscathed.
The markets flirted with positive territory in the morning, but slipped lower in the afternoon session. At the close, the Dow was down 434 points (1.73%), the S&P 500 lost 37 points (1.37%) and the Nasdaq dipped 92 points (1.27%). The iShares MSCI Emerging Markets ETF (EEM) lost a minuscule 0.08 points (0.17%) to close at 47.94.
Alibaba (BABA), which looked on Monday like it was ready to top its November/December resistance just above 190, took a big hit from the market’s sharp pullback, and is finishing its fourth month in its trading range. Alibaba is making all kinds of investments, like setting up a joint AI research in Singapore (its first outside China), but that’s hardly headline news. We know all we need to know about Alibaba, its giant cash reserves and its acquisitive nature. At this point, we can pretty much manage our position by watching the chart, and the chart tells us that buyers and sellers have fought one another to a standstill. We’ll keep BABA on Hold. HOLD.
Autohome (ATHM) touched its 50-day moving average on Wednesday, but held that support today. When the company reports its latest quarterly results next Wednesday (March 7) before the open, analysts are expecting revenue of just over $268 million and earnings of 69 cents per share. We will move the stock to Hold, but if you’re still tempted, be sure to take a smaller bite this close to earnings. HOLD.
BeiGene (BGNE) sprang its Q4 and full-year 2017 results on the market yesterday, reporting sales of $18.2 million for the quarter and a loss of $2.19 per share. The stock opened down on the news, but strengthened quickly as investors put the loss into perspective. BeiGene’s full-year report was eventful, with the transformational deal with Celgene (which gave BeiGene a small portfolio of products to sell in China), a successful $800 million offering in January and a string of hopeful results from late-stage clinical trials. BGNE has been affected by the market pullback this week, but hasn’t even dipped below its 25-day moving average. This dip looks like a good buying opportunity. BUY A HALF.
China Lodging Group (HTHT) has executed a complete V-shaped correction and rebound, and is now trading right on top of its 50-day line. It’s likely that the stock will continue to trade sideways as investors await the company’s quarterly results on March 13 after the close. Analysts are predicting a hair over $344 million in revenue and 73 cents per share in earnings. The company recently announced a joint venture with TPG Capital Asia to acquire a couple of Beijing hotels, which is further evidence of management’s aggressiveness. We will keep our recommendation to Hold a Half position until we see which way the wind is blowing after the earnings report. HOLD A HALF.
GDS Holdings (GDS), which zoomed from 9 last September to over 30 in early February, remains in a well-deserved consolidation. The stock touched its rising 50-day moving average in January, again in February and is just atop it now, forming a nice string of rising lows. The stock’s future will probably come down to its reaction to the quarterly report on March 13 before the market opens. Analyst coverage is thin, but the consensus is for $76.8 million in revenue and a loss of 15 cents per share. The corporate server business should be a pretty easy to forecast, but we’ll see. We’ll move to Hold until investors have had a chance to digest the numbers. HOLD.
Melco Resorts (MLCO) was sold in last week’s issue. The stock hasn’t shown a lot of weakness, but it was trading at its December price and we decided to raise some cash in the portfolio by letting an underperformer go. SOLD.
Petrobras (PBR) dipped with the market in early February, but its bounce was remarkably strong, pushing the stock to new highs above 14. That means it’s performing better than the oil patch as a whole, which is constructive. The company has gained preliminary approval for a $2.95 billion settlement of a class action suit brought by U.S. investors for corruption-based losses. Petrobras has also reached a possible settlement of a suit over a contract for deep water rigs. The effect won’t be big, but investors are always pleased to see legal hassles calmed down. There’s no earnings date yet, but the Q3 report was on November 13, so it can’t be far off. BUY A HALF.
TAL Education (TAL) has actually been outperforming the market over the past week or so, resisting the pullback on Tuesday and Wednesday and holding on to most of its February rally from 29 to 39. TAL is well above its rising 25-day moving average and looks fine, especially with earnings safely in the books. We’ll keep TAL at a Buy rating for a half position. BUY A HALF.
Tencent Holdings (TCEHY), which is always volatile, dipped below its 50-day moving average on Wednesday, but popped back above it today. If you use the November 21 high as a marker, TCEHY has been trading sideways for a few months. But this is another stock that more than doubled in 2017, so a correction/consolidation is not only expected, but actually beneficial. Tencent will report earnings before the open on March 21, but there are no analysts’ estimates as benchmarks since the stock trades over the counter. Tencent’s partnership with Spotify (which has just filed for a New York IPO) is likely to solidify its dominance of the online music business in China. We will continue with TECHY’s Buy rating for a half position, although a good reaction to earnings (and an improved tone to the market) would have us considering averaging up. BUY A HALF.
Vipshop Holdings (VIPS) paused under resistance at 19 in February, but its decline during the Tuesday/Wednesday pullback found good support at its 25-day moving average. VIPS reacted well to its February 12 earnings report and looks good here. BUY.
Weibo (WB) made new highs in September, November, January and February, but pulled back after each of them. WB is now down from 140 to 128, but is still above its 50-day. We think you can use this pullback to take a small position in WB, but only if you have too much money on the sidelines. We will keep WB rated Buy, but keep it small and your stop relatively tight. BUY.
YY Inc. (YY) will report its latest results on Monday (March 5) after the close. YY has actually been behaving itself better than the broad market, riding its falling 25-day moving average down from its February high near 140 to just under 130. We’ll keep our half position in YY rated Hold and watch the reaction to earnings. Analysts are expecting revenue for the quarter to come in around $551 million with earnings of $1.84 per share. HOLD A HALF.
