WHAT TO DO NOW: Our Emerging Markets Timer has turned negative, but its action of the past two months looks more like a trading range than a downtrend. Overall we continue to take things on a stock-by-stock basis; we have several stocks that are teetering on the edge of being kicked out of the portfolio, but we’re inclined to be patient unless a stock’s decline forces our hand. Tonight, despite the yellow light, we’re going to add a half position in Azul S.A. (AZUL) but will return two stocks, Alibaba (BABA) and Vipshop Holdings (VIPS) to Hold ratings.
The iShares EM Fund (EEM) fell decisively below its 25- and 50-day moving averages on March 22 but bounced decently today. There have been a number of whipsaw moves from EEM since early February, which makes the intermediate-term trend look as much sideways as down. The action of the Golden Dragon ETF (PGJ) that tracks Chinese ADRs, is a bit worse, with its retreat in recent days looking much sharper. Technically, the Cabot Emerging Markets Timer is negative, so you should limit new buying and keep losers and laggards on tight leashes.
We have no idea how long this correction will go on, or how deep it will get, and neither do the dozens of talking heads who are peddling their predictions. The important thing is to be aware of what’s happening and react promptly to the movements of our stocks.
With the quarterly report from Petrobras (PBR) on March 15, earnings season is over for the stocks in our portfolio.
The markets rallied nicely today, finally showing some lift after a few punishing days. At the close, the Dow was up 310 points (1.30%), the S&P 500 had rallied 37 points (1.42%) and the Nasdaq surged 114 points (1.64%). The iShares MSCI EM Fund (EEM) was up 99 cents (2.09%) to finish at 48.28.
Alibaba (BABA) has been all over the map for the past five months, showing a ton of volatility that has dropped the stock from over 200 in late January to as low as 169 in early February. The good news is that the stock has booked a series of higher lows since its December 165 reading. There’s no guarantee that this won’t change soon if the market continues to fret, but we’re not going to pull the plug on a profitable holding until it gives a definitive signal that it’s done. We’ll move BABA to a Hold rating and keep a mental stop around 170. HOLD.
Autohome (ATHM) has been feeling the burn along with the rest of the growth stock universe, but it’s still atop its 50-day moving average and holding up well. Our profit is slim, but the stock’s relative strength (and series of higher lows since December) is a positive. We’ll keep ATHM rated Buy, but keep any initial investment small. BUY.
Azul S.A. (AZUL) has been trading sideways in a tight range since it capped its March rally above 34 a couple of weeks ago. But AZUL edged out to a new all-time intraday high on Tuesday and is sitting well above its rising 25-day moving average. In short, it’s probably the strongest chart of all of our stocks. So, despite the warning signal from the Emerging Markets Timer, we’re going to add a half position in AZUL to the portfolio tonight. BUY A HALF.
BeiGene (BGNE) ripped higher from March 19 to March 21, then scrubbed off those gains in a two-day correction. But BGNE has shaken off the wobbles of the broad market and is sitting on top of its 25-day moving average and trading on calm volume. Very few stocks can stay completely unaffected by a down market, but BGNE has been managing quite well. We will keep the Buy a Half rating, but don’t jump in unless you have a good bit of cash on the sidelines. BUY A HALF.
Fibria Celulose (FBR) gapped down on March 16 after the company accepted a takeover bid from a Brazilian rival. We sold our half position at a small loss and held the cash. FBR has been trading sideways on declining volume since then. It was a good sell. SOLD.
On the one hand, GDS Holdings (GDS) has been resisting the downward trend of the market, which is a good thing. On the other hand, the stock has been trending sideways in a tightening range since January when it announced its secondary offering of eight million shares. We still have a profit in the stock and it doesn’t look threatened in any way. We will keep the position rated Hold until we get a definitive move one way or the other. HOLD.
PagSeguro (PAGS), which is so young that it doesn’t have a 50-day moving average yet, has been acting very well, ignoring the market’s weakness and keeping its corrections short and shallow. We will keep it rated Buy a Half. BUY A HALF.
Petrobras (PBR) is still emerging from a long bout of scandal and expensive court cases. The company has settled a major U.S. class-action suit and management has announced that it will reach or exceed its goal of reducing debt to 2.5 times EBITDA. The stock has been showing considerable composure in a tough market environment, using its January resistance as support as it consolidates its February gains. The longer the stock can hang on right around our buy price, the greater the odds that the next move is likely up as the company works to reduce its obligations so its underlying assets (an absolute ton of oil reserves and industry leading technical expertise) can shine when the market picks up again. BUY A HALF.
TAL Education (TAL) has completed the process of shaking off its October gap down. The stock booked new all-time highs in February and again on March 20, when it soared above 41. The correction to below 37 looks to be slowing and this pullback is a perfect entry point. We are holding off increasing our stake until we see both the broad market and the stock show greater strength. BUY A HALF.
Tencent Holdings (TCEHY) is on thin ice at this point, having gapped down on huge volume on March 22. It’s tempting to just exit the position and take our big profit. But a look at the chart shows a pattern of big corrections exactly like the one the stock is staging now, followed by renewed advances. This pullback doesn’t look all that bad in perspective. The fundamentals are so strong—revenue growth of 62% in Q4 and earnings up 47%—that we’re inclined to hang on until we get a definitive technical sell signal such as a drop below 51 on heavy volume. News two days ago that Walmart was replacing Alibaba’s Alipay online payment utility with Tencent’s WeChat is also a positive. HOLD A HALF.
Vipshop Holdings (VIPS) has been dented by the general decline in EM stocks on March 23–23 and March 27–28, and has slipped below 17, its support level over the last month or so. It’s not a killer correction, and the company’s alliances with China’s online retail giants should provide support. But it seems prudent to take the stock off the Buy list until it shows some strength. HOLD.
Weibo (WB) is a big story with huge potential in China. But the stock has had a long run that dates back to February 2016 and the last six days of trading have rubbed out our small profit. WB was hit especially hard by the four days of heavy EM stock declines, perhaps because its big gains make it look like a good stock to take profits in. Today’s small rebound is hopeful, and keeps our position barely in the black. We lowered the stock’s rating to Hold last week and we will keep it there because we don’t want to be shaken out of one of the more attractive stories in China. But WB is on an extremely short leash. HOLD.
