WHAT TO DO NOW: The Emerging Markets Timer continues to flash a buy signal, although the iShares Emerging Markets Fund (EEM) has weakened somewhat. The only change in the portfolio today is selling VanEck Vectors Russia ETF (RSX).
Market Environment
The political situation remains noisy, but investors continue to expect increasing interest rates from the Federal Reserve Board and substantial spending from the Trump administration. All of the major U.S. stock indexes enjoyed big up days on March 1, moving out to new record highs, and the anticipated slump today was reasonable. All in all, the market seems to be quite reconciled to the political struggle, concentrating instead on the healthy economy and economic indicators.
The iShares Emerging Markets Fund (EEM) gapped down last Friday, and has now dipped below its (upper) 25-day moving average despite the big market-wide boost on Wednesday. We’re keeping a wary eye on EEM, but our buy signal is still in force.
Earnings season for emerging market stocks is winding down, with JD.com reporting before the open today. Investors rewarded the stock with a high-volume round of buying at the open, but the stock gave much of that gain back as the day wore on. We still have China Lodging’s to look forward to on March 14, and Pampa Energia and BeiGene, which still haven’t set dates.
Markets skidded lower all day, giving back yesterday’s big gains, but the major indexes are still in fine shape. At the close, the Dow was down 114 points (0.53%), the S&P 500 fell 14 points (0.59%) and the Nasdaq dipped 43 points (0.73%). The iShares MSCI Emerging Markets ETF (EEM) also sold off, losing 0.68 points, a dip of 1.76%, to finish at 37.90.
Recommended Stocks
Alibaba (BABA) has been dithering around under resistance at 104 since late January. That’s the bad news. The good news is that BABA’s lows during this period have been rising, riding its 25-day moving average higher since February 15. EM stocks (as tracked in the Golden Dragon ETF (PGJ)) rose strongly in February and BABA didn’t. But that’s because BABA’s big gain came in January. We think the period of flat trading constitutes a re-basing for the stock, and is an opportunity to get in if you don’t own it. Shoot for 101 or 102. BUY.
Our newest holding, Banco Santander Brazil (BSBR), has been consolidating at 11, which is down just three-quarters of a point from its February 15 high. It looks like a good buy right here. BUY.
BeiGene (BGNE) announced today that it will present data from the Phase IB dose expansion study of one of its candidate anti-cancer drugs and three other pipeline agents at the April 1-5 meeting of the American Association for Cancer Research. BSBR reacted well to the news, pushing out to new all-time highs. This young stock has now broken out of its post-IPO consolidation. We will want to see some substantive news from clinical trials before we fill our position, but BGNE looks healthy here. We will keep the stock on Buy, with a recommendation to take a half position. BUY A HALF.
China Lodging Group (HTHT) has been in an uptrend for two full years (it bottomed at 15 in March 2015), but there have been a couple of big reset corrections along the way. At this point, anything can happen, especially with earnings coming up on March 14 before the market opens. So we’re in a period when caution is appropriate. If you want to start a position in HTHT, start small and watch the chart like a hawk to see how investors react to the earnings report. And on the other hand, the stock has just rallied to new all-time highs, which is a strong recommendation. Analysts are predicting earnings of $0.02 per share and revenue of $233 million. We’ll stay on Buy. BUY.
JD.com (JD) reported earnings this morning and the news was good. Analysts were expecting the company to book a loss of six cents per share and revenue of $11.15 billion in earnings. But the actual report featured EPS of five cents and revenue of $11.5 billion. The company also announced that it is selling off its money-losing JD Finance stake, receiving $2.1 billion in the sale and retaining a right to 40% of future gross profits when JD Finance turns profitable. There is also an option to covert JD.com’s profit-sharing rights into a 40% equity interest. All in all, it was a good day for JD.com, and while its stock didn’t hold its gap-up gains for very long, the reaction was positive. We’ll keep the stock rated Buy. BUY.
NetEase (NTES) has been digesting its big February 16 gap-up move that followed the company’s strong quarterly report. The stock vaulted to 298 the day after earnings and made a run to 309 yesterday intraday before slipping lower for a couple of sessions. NTES hasn’t filled its gap, and trading volume on its down days hasn’t been alarming. Several analysts raised their ratings and price targets after NetEase’s great report and the company’s dividend increase (to a 1.1% annual yield) was also taken as a show of strength. We think this correction is a good chance to initiate a position if you don’t own any. BUY.
Pampa Energia (PAM) continues to consolidate its big January gains. Trading volume is ramping down slightly, which is also typical of a resetting period. We’ll stay on Buy for now, and are watching to see if the stock’s 25-day moving average, which has reached the stock’s current price, can provide some lift. BUY.
TAL Education (TAL) tacked on five quick points on Wednesday as the potential of the private education sector in China continues to draw attention. TAL pulled back in today’s trading, slipping just below 90, which looks like a good buy point if you’re not in yet. BUY.
Vale (VALE) has been weakening since its February 23 earnings report, despite the good results. With iron ore prices continuing to hold their gains, the future continues to look bright for VALE, but we are paying close attention to the chart to see how investors are feeling about it. We will stay on Buy, but if it continues its correction to below the 50-day moving average (now at about 9.7), we will take another look. BUY.
While VanEck Vectors Russia ETF (RSX) hasn’t broken down, but it hasn’t shown any signs of getting moving again. We moved the ETF to a Hold rating in last week’s issue and set a stop at 21, which has now been breached. We will change our rating to Sell and look for a stronger candidate. SELL
Weibo (WB) closed at 58.2 on February 22, then dropped to 48.9 at the close on February 23. But except for that one high-volume trading day, the stock has been acting well, and now looks like it wants to use 50 as its new support level. We like this story and would like to hold on, so we will stick with our Hold rating on our half position. But any further weakness will send WB packing. HOLD A HALF.
ZTO Express (ZTO) had a nasty day on February 28, gapping down from its previous day’s close at 14.5 to 13.5 at the open and swooping to as low as 12.3 in intraday trading. But the stock steadied itself and closed the day near 13, which has been support in the intervening two days. Since it costs us nothing to keep the stock on the watch list, we’ll be patient. But any move toward its old low at 12 and we’ll show ZTO the door. WATCH.
