WHAT TO DO NOW: The Cabot Emerging Markets Timer is solidly negative, and the U.S. indexes have joined in the decline. We are going to increase our cash position by selling our half position in RYB Education (RYB) and nudge our defensiveness up a tic by moving Ecopetrol (EC) to a Hold.
With the earnings circus in town and U.S. mid-term elections right around the corner, it’s hardly surprising that there’s increasing fret among equity investors. The Cabot Emerging Markets Timer has been negative for a while now and the U.S. markets has joined it in flashing a yellow light. Companies that report good quarterly results are getting sub-par increases and those that disappoint are being thrown over the falls. It’s a good time to be defensive, and we’re taking another step back today.
The iShares EM Fund (EEM) either touched or made brief trips above its 25- and 50-day moving averages in every month this year, but October has been a different story. Here’s a daily chart of EEM from the beginning of the year, and you can see that the fund’s rapid decline earlier this month created a separation that EEM hasn’t been able to overcome. This isn’t surprising, as the major U.S. indexes have joined EEM in negative territory, dipping below their 200-day moving averages during the past week, reflecting a strong surge toward the exits for all equity investors.
We’re already in the first stages of earnings reports for the third quarter, with two of our companies’ results already on the books and firm dates for four others. Vale (10/24) and WNS Holdings (10/25) have already dropped their numbers, and here are the others.
iQiyi - October 30 after the close
Baidu - October 30 after the close
Ecopetrol = October 31 after the close
Petrobras - November 6 before the open
The major U.S. indexes rebounded from yesterday’s big losses, opening to the upside and heading higher all day until a little wave of selling in the last half hour. At the close, the Dow was up by 401 points (1.63%), the S&P 500 gained 50 points (1.87%) and the Nasdaq vaulted higher by 210 points (2.95%). The iShares MSCI Emerging Markets ETF (EEM) advanced 0.71 points (1.85%) to finish at 39.09.
Alibaba (BABA) experienced a slide from 166 as October began to a low close at 138 on October 10. But the stock rebounded to 150 on October 16 and hasn’t dipped below 140 for a couple of weeks. That’s not a huge cause for celebration, but it’s a small sign of relatively strength; having sold half of our position and booked profits, I’m willing to be patient a while longer. All the news about Alibaba is positive, and its chart has the beginnings of a bottoming structure. HOLD A HALF.
Baidu (BIDU) shows a correction similar to BABA’s in early October, but the stock hasn’t formed as solid a base. Today’s rally is a positive, of course, but earlier rallies (like the one on October 11) haven’t led to any upside follow-through. It’s good to have BIDU on the watch list, and that’s where I’ll keep it for now. When the company releases its Q3 results next Tuesday, analysts are expecting $4 billion in revenue and $2.43 in earnings per share. As always, the reaction will be more important than the numbers themselves. WATCH.
Bilibili (BILI) has been trading sideways since late August, which makes it a strong relative performer. The stock has found support near 12 at least three times over the last couple of months, indicating that investors are interested enough to hit the buy button when they see it at bargain prices. The big capital investment from Tencent Holdings is certainly being regarded as a character witness for Bilibili. I’ll keep it on Watch until I see evidence of buyers driving the stock past its resistance at 14. WATCH.
Ecopetrol (EC) hit a couple of days of selling on increased trading volume on Tuesday and Wednesday, pulling the stock below its 50-day moving average. Part of the decline is attributable to falling oil prices, but the reason is less important than the chart action. Ecopetrol’s Q3 report next Wednesday will be interpreted partly by comparison with analysts’ estimates of $6.04 billion in revenue and sixty cents per share in earnings. We’ll move our half position in EC to a Hold rating until we either see a good reaction to earnings or a show of strength from the market. HOLD A HALF.
Huya Inc. (HUYA) isn’t making any dramatic moves, but it has been trickling downhill since the middle of June. It’s still a very young stock (it just picked up its 50-day moving average in July) and that’s likely to keep things volatile. So, on the one hand, its decline has been under control, but on the other hand, it’s been heading down for more than four months. We’ll keep it on the Watch list. WATCH.
iQIYI (IQ) continues to mimic HUYA’s gradual decline. We still have a small profit on our remaining half position, and the company will report its Q3 results next Tuesday after the close. Thus, we’ll keep the stock on Hold. Analysts are forecasting revenue of $995.6 million and an earnings loss of 44 cents per share. HOLD A HALF.
Petrobras (PBR) has been a model of strength during the market’s swoon, heading higher from the middle of September through early October and trading sideways with support at 15 since October 8. Earnings are due on November 6, and if the stock can hold its sideways trend until then, that will constitute an admirable base. Analysts expect Petrobras to report $25.2 billion in revenue and 44 cents per share in earnings. We’ll keep PBR on Buy, but only if you already have a heavy cash position and only small amounts this close to earnings. BUY A HALF.
RYB Education (RYB) was doing a great job of holding up in a tight sideways pattern until October 10, when it slipped below its 200-day moving average on increased volume. The stock has recovered from its Tuesday intraday low at 16, but is still tripping our loss limit. We will Sell our half position and hold the cash. SELL.
Vale (VALE) missed its Q3 earnings estimates in its report on Wednesday, but beat on revenue. The news took a small bite out of VALE, but the stock rebounded today on reasonable volume. With VALE sitting just a hair below where we bought it, I’ll keep it on Buy, as it’s hanging in above the bottom of its trading range. There’s some sensitivity to oil prices here, but the stock isn’t acting badly. I still think of VALE as a lower-risk Buy. BUY.
WNS Holdings (WNS) reported its Q3 numbers this morning and the market liked what it saw. Revenue was up 7% and earnings grew 23%. The company added seven new clients during the quarter and expanded 13 existing relationships. The stock spiked higher at the open, then dipped sharply, but wound up the day trading in the middle of the range it has occupied since October 16. I still need to see more evidence of increasing appetite for WNS before jumping in, but the stock’s relative calm is plenty to keep it on our Watch list. WATCH.
