WHAT TO DO NOW: Emerging market stocks have had a nasty week, with the iShares EM Fund (EEM) dropping decisively below its 25- and 50-day moving averages. While we have several stocks that are vulnerable, we’re going to stand pat for now and have no moves in the portfolio.
I feel the need to deliver a short cautionary sermon, so here it is.
We’ve been enjoying a long stretch of good performance, partly due to good stock selection, but also as a result of two years of support from major market trends. So, the first day of summer seems like a perfect time to talk about how seasons can change in the market.
Emerging market stocks had a great 2017, with EEM soaring from 34 to 47 during the year and then continuing to 52 in January 2018. The entire year never had a correction that lasted more than three weeks, and EEM had only one extended stretch of trading (in December) under its 50-day moving average.
Since late January, though, EEM has been a wet mess. The stocks in our portfolio have been showing good results—like IQ’s doubling since our buy and ATHM’s steady progress—but emerging markets as a whole have been taking on water.
Nobody knows when the correction in emerging markets will end or how steep and protracted it will be. All we can do is stay on the lookout for stocks that are beating the odds and keep our cash position high enough to give us some insulation while the Cabot Emerging Market Timer keeps signaling caution. We may be helped by the divergence between the broader EEM and the relative strength of the Golden Dragon ETF (PGJ) that tracks Chinese ADRs, but we will keep following the rules.
The football coach at my high school used to say when the team was up big at halftime, “Don’t get cocky!” And I always remember that markets like to make people look smart for a while. But only for a while. Stay tuned.
Okay, sermon’s over.
The iShares EM Fund (EEM) has been in an extended downtrend (despite the February rebound) since January, and started an even steeper correction last Friday. Instead of using the falling 50-day moving average as resistance, EEM has lost touch with its moving averages completely. As far as the Cabot Emerging Markets Timer is concerned, it’s been three solid months of yellow flags.
The Golden Dragon ETF (PGJ) has been range-bound since January, but a rally from late April through the middle of June has given us a positive divergence in Chinese ADRs. With PGJ above its lower moving average since May 4, that’s been a technical positive. PGJ got rapped on June 19, but even with today’s washout, it’s still above its 25-day moving average. We will continue to be cautious and handle our portfolio on a stock-by-stock basis.
The markets retreated today, with the Dow down by 196 points (0.80%), the S&P 500 down 18 points (0.63%) and the Nasdaq off 69 points (0.88%). The iShares MSCI Emerging Markets ETF (EEM) slipped lower by almost two-thirds of a point (1.43%) to close at 43.46.
Two weeks ago, 51Job (JOBS) took a hit from a sour market and dipped from its June 6 high at 115 to around 105. But although the stock hasn’t been able to make any real headway, that support at 105 has held. JOBS took a big intraday hit last Tuesday, but recovered quickly. Thus far, this looks like a normal consolidation after the stock’s May rocket shot. I’ll keep JOBS rated Buy a Half, but will use the stock’s 50-day moving average (now at 105) as a mental stop. BUY A HALF.
58.com (WUBA) is sticking to the trading range that’s hemmed it in for quite a while. With its pullback below 80, the stock is now trading at its November 2017 price. With the stock on Hold and the portfolio holding a substantial amount of cash, there’s no reason to kick WUBA out right now. The stock is still consolidating a monster run that stretched about a year from February 2017. Revenue and earnings growth have been excellent and estimates for 2018 earnings call for a 30% gain, so we’ll keep an eye on our mental stop at 75, but will stick with WUBA until it forces our hand. HOLD A HALF.
Alibaba (BABA) took about a 2% hit today, but stayed above its old resistance at 200. The stock hasn’t yet bounced back from Altaba’s (the new name of Yahoo!) use of its big stake in Alibaba to power a share buyback program. Alibaba is healthy, innovative and ambitious, and I don’t see any other candidates for the title of “must have” Chinese stock. We’ll stay on Buy. BUY.
Since its January blastoff, Autohome (ATHM) has been stair-stepping higher, with short, sharp rallies followed by consolidations of a few weeks. If this pattern holds, ATHM should be getting ready to pop again. The stock reached an intraday high near 120 on June 1, setting its resistance level, and the rising 25-day moving average is now at 111 (with the stock at 114). I like the company’s strategic investment in TTP Car, a Chinese used-car auction site. The stock is also showing good strength during today’s market weakness. We’ll stay on Buy. BUY.
BeiGene (BGNE) was hit by five days of selling on increasing volume from June 11 through June 15, but looks to have found support at 165 and is now trading near the 170 level that we identified in last week’s issue. There hasn’t been any negative news from clinical trials or trouble with its alliance with Celgene. We will keep our half position rated Hold for now. HOLD A HALF.
GDS Holdings (GDS) has been acting fine, with a big advance from 42 to 46 on June 14 and a pullback to 43 over the past five days. GDS is holding well above its rising 25-day moving average, which is at 40.6. There’s no news on GDS, which is fine. BUY.
iQIYI (IQ) finished yesterday at 44, slid to 40 in the first hour of trading today and to 38 a little before noon. The stock wambled up and down in the afternoon session, but didn’t show any movement toward a new low. A correction of 10% or more in one day demands to be taken seriously, but there’s no reason to get in an uproar either. We have only a half position and a big profit. We knew that high volatility could cut both ways, so this big profit-taking dip isn’t a surprise. If you have the temperament to play a big mover, this pullback looks like a reasonable buy point, although there may be more ups and downs ahead. BUY A HALF.
Momo Inc. (MOMO), our newest recommendation, took a hit along with everything else on June 19, but still hasn’t given back all of its June 8 gains, much less its big blastoff rally in late May. With its 25-day moving average at 47 and rising fast, MOMO looks like a good buy on any normal weakness. BUY A HALF.
Noah Holdings (NOAH) isn’t acting especially well, but we’re willing to let it sit on the watch list for a while. The numbers are still good and institutional investors are maintaining their positions, so we’ll just keep an eye on it. WATCH.
TAL Education (TAL) looks to have found support between 38 and 39 as it rides out the short attack from Citron. This calm re-basing is pretty good evidence that the allegations have been fully discounted, but we’ll keep our half position rated Hold until we see investors starting to move back in on the company’s strong fundamentals. HOLD A HALF.
ZTO Express (ZTO) has taken a pretty strong hit over the past six trading days, but still hasn’t filled its May 29 gap. With the news about Alibaba’s strategic investment still fresh and excellent revenue and earnings growth numbers, we’re not too worried. You can use this pullback to start a half position. BUY A HALF.
