WHAT TO DO NOW: The Emerging Markets Timer is emphatically negative, as the MSCI Emerging Markets Fund (EEM) has fallen hard on the two days since the election. Tonight we’re moving Petrobras (PBR) to Hold and Selling Half of our position in Alibaba (BABA).
Market Environment
U.S. markets were mixed today after a remarkable three-day rally in the S&P 500 that began on Monday. The market is still working out the potential winners and losers implied by a Trump presidency, but having the S&P and the Dow above their 25- and 50-day moving averages is a good first step, although there’s no question the action is incredibly bifurcated. Investors are now calculating the odds of a Fed rate hike in December and watching intently as a Trump administration, together with a House and Senate all under one party, shapes up. Increased volatility is likely.
The situation in emerging markets is less attractive, as the iShares Emerging Markets Fund (EEM), after a remarkable two-day rally on Monday and Tuesday, has fallen sharply on heavy volume. This has turned the Cabot Emerging Markets Timer solidly negative. We’ve already pared back and we’re keeping laggards on tight leashes.
Investors are likely lightening up on emerging market issues in light of the uncertainties represented by a more confrontational incoming administration. One big event to watch will be tomorrow’s Singles Day in China. Singles Day (always November 11 or 11/11) is the largest single-day retail event in the world, and the numbers will likely set the tone for Chinese online retail companies in general and Alibaba (BABA) in particular.
We’re more than halfway through earnings season for our stocks, and the results so far have been mixed. Most earnings reports have beaten expectations, but reactions to earnings haven’t reflected that directly. Clearly there are other factors on investors’ minds.
The markets have acted well since the election on Tuesday, with the Dow leading the way and the Nasdaq bringing up the rear. Today the results were mixed, with the Nasdaq down modestly. At the close, the Dow gained 218 points (1.17%), the S&P rose 4 points (0.20%) and the Nasdaq dipped 42 points (0.81%). The iShares MSCI Emerging Markets ETF (EEM) fell 1.04 for loss of 2.87% to finish at 35.22.
Recommended Stocks
Alibaba (BABA) didn’t react well to earnings, although it’s hard to sort out how much that reflects investors’ attitude toward Alibaba and how much is just a desire to lighten up in China. Strong sales figures from tomorrow’s Singles Day (reports should come out early next week) could attract new buyers, but that’s not a sure thing. We’ve had the stock on Hold, and our loss is still within normal levels, but we need to protect our position, so we’ll sell half of our stake and keep the rest on Hold. SELL HALF, HOLD THE REST.
China Lodging Group (HTHT) has staged a lively rally, briefly topping 47 today after closing at 42 a week ago. Earnings are scheduled for November 14, after the close, so this move isn’t related to quarterly results. We’re delighted with the move, of course, but still won’t move a stock back to a buy rating this close to earnings. If you own it, just hold on. If not, stay tuned for next Monday’s news. HOLD.
Melco Crown Entertainment (MPEL) has been drifting marginally lower on active trading since its November 3 earnings report, but remains safely above its moving averages. To this point, sellers haven’t been able to sink MPEL below resistance at 17, which is good. We’ll stay on Watch until we get the stock and the market heading up. WATCH.
Momo Inc. (MOMO) was calm on Wednesday following its wild Tuesday action when it spiked to 28 at the open, then corrected strongly to support at 23 during the day. Today’s action has shaved another point off the stock, but looks more like general market weakness. With our half position already on Hold, we will keep MOMO on a tight leash; a dip below 21 would be bearish. HOLD A HALF.
NetEase (NTES) had been following its 50-day moving average higher after a three-day correction from October 31 to November 2. But the stock caught a downdraft from the market today and dipped below 230. This is a moderate correction on above-average volume, but we’re inclined to favor yesterday’s rally after NetEase reported quarterly results before the open as a better clue to the stock’s strength. The report showed NetEase’s revenue increasing by 32% to $1.38 billion, but analysts were predicting $1.34 billion. Earnings of $3.42 per share were ahead of expectations, but gross margins were down slightly. A dividend of 78 cents per ADR will be paid on December 2. We’ll stay on Hold, but the shortfall in revenue may chill investors in the short run. HOLD.
Petrobras (PBR) has also been volatile, with a six-day correction that ended on November 3 (last Thursday) giving way to a little rally earlier this week. Today’s weakness has pulled PBR to its 50-day moving average, giving us about a 10% loss. Peetrobras will report earnings tonight, after the close. We’ll change the stock’s rating to Hold and keep it on a tight leash. HOLD A HALF.
Two weeks ago, after TAL Education (XRS) reported its quarterly results, the stock gapped up to as high as 83, but gave back all of its gains in a three-day correction from October 31 to November 2. That’s the same time that the Golden Dragon ETF (PGJ) was going over the falls, although XRS was much stronger, and got back on track quickly. With our market timing indicator negative, we don’t advise a lot of buying, but we will keep XRS rated Buy, with a recommendation to keep initial positions small until the market gets back on our side. BUY.
Tencent Holdings (TCEHY) corrected significantly from October 25 through November 4, but has recovered to support at 26. With earnings due on November 16 (next Wednesday, before the open) we’ll stay on Buy, but keep your purchases smaller than usual. BUY.
Weibo (WB) has alternated daily gains and losses this week, but has enjoyed support at 44. After the stock’s swoon in the second half of October, we put the stock on Hold in last week’s regular issue. Weibo is the only one of our holdings that hasn’t announced a date for its quarterly results. Since Q2 earnings came out on August 8, the date will come up sooner rather than later. But having booked a partial profit (we sold 1/3 of our shares two months ago) and still enjoying a big profit cushion, we’re inclined to be patient. We’ll keep our recommendation to Hold. HOLD.
Your guide to global investing,
Paul Goodwin
Chief Analyst, Cabot Emerging Markets Investor
