WHAT TO DO NOW: The Cabot Emerging Markets Timer is solidly negative. We sold Beigene (BGNE) in a Special Hotline yesterday, and are selling half of our position in Alibaba (BABA).
The headline-making meltdown in U.S. stock markets on Wednesday, when the Dow fell 3.2% and the S&P shed 3.3%, made it clear that investors aren’t just worried about emerging markets. A rising interest rate environment and uncertainty about what effect trade wars and Brexit might have on global growth have given investors too much to worry about. And the extremely long bull market, with especially strong performance from tech favorites, left those assets chock-full of late buyers who are being forced out as prices plummet.
In the long run, the reasons for the medium-term correction in emerging market stocks and the short-term pullback in U.S. stocks are not really important. The important thing is to take action to protect capital, and we’ve been doing that for months now, holding a high percentage of the portfolio in cash and increasing that percentage yesterday with the sale of our half position in Beigene (BGNE).
The iShares EM Fund (EEM) has hit its seventh new low since its February slump, and is sitting more than 6% below its lower (25-day) moving average. All three of its relevant moving averages (25-, 50- and 200-day) are now heading down. That’s as clear and emphatic a sell signal as we’ve seen in a while.
The major U.S. indexes continued their losing ways again today, with the Nasdaq experiencing slightly lower losses. At the close, the Dow was down by 545 points (2.13%), the S&P 500 fell 57 points (2.05%) and the Nasdaq dipped by 93 points (1.25%). The iShares MSCI Emerging Markets ETF (EEM) fell 0.4 points (1.00%) to finish at 39.14.
I have let the portfolio’s profit cushion (we bought at 102) keep us in Alibaba (BABA) despite its persistent downtrend since June. But the stock lost contact with its 25-day moving average earlier this month and has seen some high-volume selling, with part of the blame falling to lowered price targets from analysts. Today’s bounce shows that there are some bargain hunters out there, but not enough to power a rebound. I’m going to book profits in half of our position and hold the rest. SELL HALF, HOLD THE REST.
Baidu (BIDU) put in a nice double bottom at 208 in August and September, but its free-fall in October has dropped it decisively through that potential support level. The buzz about BIDU centers on the stock’s rising attractiveness as a valuation target. It’s true that a 17 P/E for a company that booked a 59% bump in earnings and a 27% hike in revenue in Q2 does sound attractive. But with the winds of the market blowing in the wrong direction, we’ll just keep watching while we wait for the buyers to start paying attention. WATCH.
BeiGene (BGNE) built a series of higher lows in June, August and September and looked to be tightening up nicely. And news that one of the company’s drugs—Vidaza, on exclusive license from Celgene—was approved for reimbursement by the State Medical Insurance Administration in China should be good news for investors. But BGNE’s slip from 175 on October 1 to well below 130 was just too much to take. I recommended selling our half position in BGNE in a Special Hotline on Wednesday. SELL.
Bilibili (BILI) has been enjoying a series of higher lows since it dipped to 9 on August 15, and it looks much stronger than the general run of Chinese stocks. That’s probably the lasting halo effect of Tencent Holding’s massive $320 million investment in Bilibili. It’s still not enough reason to start buying BILI, but it certainly puts it at the top of the Watch list. WATCH.
Ecopetrol (EC) has been feeling the pressure from the broad market retreat, but is still in contact with its 25-day moving average and is showing us a razor-thin profit. If all is well, EC will find support around 25, which was its September correction low. The oil sector seems like a pocket of strength globally, so we’ll keep our Buy a Half recommendation on EC. BUY A HALF.
Huya Inc. (HUYA) has been bouncing slowly downhill since the middle of June, which is a negative. On the other hand, the stock has been ignoring the general market meltdown this month, which is a positive. It’s possible that HUYA is finding support just above 20, and if it can hold there for a while, it might prove to be a great base to build on. Being stronger than the market isn’t enough to trigger a buy, but it’s a great thing to see in a stock on the Watch list, which is where we’ll keep HUYA. WATCH.
iQIYI (IQ) is in much the same situation as HUYA, heading gradually lower since the middle of July, but clearly avoiding most of the selling fever that’s hitting both U.S. and EM stocks this month. We still have a nice profit in IQ, but we need the stock to hold up somewhere around 25, as we don’t want to fritter away that gain. We’ll keep our half position on Hold. HOLD A HALF.
Since June, RYB Education (RYB) has been building a tightening basing structure with a central tendency around 20. But that basing structure gave way suddenly to a high-volume correction on Wednesday, knocking the stock down a full point. A continuation of that decline in today’s morning session was followed by a surge of buying that stabilized the stock in the afternoon. With our very high level of cash, we’ll keep RYB rated Buy a Half, but any dip below 18 will get a very skeptical look. BUY A HALF.
Vale (VALE) continues to hold onto its September rally, with support gradually rising in the space between 14.5 and 15. Analysts still see Vale’s higher-quality ore grades as a key advantage and the stock shares in the general leadership of Brazilian stocks in today’s global market. We’ll keep VALE rated a low-risk Buy. BUY.
After building a long basing structure around 50 since the beginning of May, WNS Holdings (WNS) caught a cold on Tuesday and fell all the way to its 200-day moving average on Wednesday. The stock firmed up a little today, but is still below its 200-day MA. WNS Holdings will release its latest fiscal quarterly results before the market open on October 25, and that will likely set the tone for the stock in the short term. We’ll keep it on the Watch list at least through that report. WATCH.
