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Cabot Emerging Markets Investor Bi-weekly Update

The Emerging Markets Timer is in fine shape after Wednesday’s big rally. We have no changes to the portfolio today.

WHAT TO DO NOW: The Emerging Markets Timer is in fine shape after Wednesday’s big rally. We have no changes to the portfolio today.

Market Environment

The Federal Reserve Board made the expected move on Wednesday by raising interest rates by a quarter point and announcing that it intended to initiate two additional quarter-point hikes this year. The market saw this confirmation of the health of the U.S. economy as good news, and both foreign and domestic stocks registered strong gains.

Investors seem inured to the noise out of Washington D.C. and are focusing on stocks and sectors that are thriving on their own. There are still big policy issues that might have major implications for certain sectors and industries, but a continuing focus on individual stocks has proven, as usual, to be the best policy.

The iShares Emerging Markets Fund (EEM) is now at its highest level since the middle of 2015, and has re-accelerated after a late-February/early March correction that came close to clipping its 50-day moving average. With our buy signal clearly in force, we are focusing on getting more heavily invested. And if we get 100% invested, we will upgrade the portfolio by selling our weakest issues, even if they’re still making money.

Earnings season has come to an end with China Lodging’s report on Tuesday morning. We have been treated pretty well by the season, although we have a couple of companies that will report in what amounts to the off season. We’ll keep you advised.

After yesterday’s Fed-inspired rally, markets opened to the upside, but weakened through the day to finish narrowly mixed. At the close, the Dow was down 19 points (0.09%), the S&P 500 fell 4 points (0.18%) and the Nasdaq was virtually unchanged, up less than a point (0.01%). The iShares MSCI Emerging Markets ETF (EEM) built on yesterday’s big gain, adding 0.23 points, a gain of 0.58%, to finish at 39.55.

Recommended Stocks

Alibaba (BABA) is still trying to break out of the trading range that has contained it since late January. News that Yahoo was creating a holding company for its stake in Alibaba (plus other foreign assets) was taken in stride by investors. The stock nudged briefly above 106 on Monday, but has generally been riding its rising 25-day moving average higher. A decisive breakout above 106 would be very good news, with its September high at 110 as a secondary target. The longer BABA holds its January gains, the better its base will be. Try to get in on a pullback of a point. BUY.

Autohome (ATHM) was just finishing a three-day, three-point rally when we added it to the portfolio last Friday, so the pullback of a little over a point wasn’t unexpected. With volume declining as the stock has pulled back, we see a good buying opportunity. BUY A HALF.

Banco Santander Brazil (BSBR) went through an alarming pullback from March 7 through March 9, dipping from 11 to 10 in the process. But the stock found support at its 50-day moving average and has now recovered more than a third of its correction. We moved the stock’s rating to Hold in last week’s issue, and that looks appropriate for now. HOLD.

BeiGene (BGNE) popped from 26 to 42 between December 8 and March 2, so it has earned the right to take a breather. The company announced last week that it was initiating a clinical study of its BGB-3111 candidate drug for use against relapsed or refractory chronic lymphocytic leukemia. This study, along with other trials, will supply the fuel for BGNE if the news is good. You can use this pullback to start a small position. BUY A HALF.

China Lodging Group (HTHT) reported earnings before the open on Tuesday and the news was very good, with earnings of 20 cents per share (where analysts had forecast two cents) and revenue of $240 million (vs. analysts’ estimates of $233 million). HTHT didn’t react much on March 14, as that was a down day for both Chinese ADRs and EM stocks in general. But the next trading day saw the stock leap higher by more than a point on double its average trading volume. HTHT is now out to new price and RP peaks with excellent momentum. We’ll stay on Buy. BUY. (JD) is continuing the rally that began in January. The company’s good earnings report keyed some high-volume buying and the stock has now taken out its April 2016 high at 30. Investors clearly approve of the company’s decision to sluff off JD Finance. We will keep the stock on Buy. BUY.

On March 8, Momo (MOMO) surged from 31 to 34 on monster volume after its March 7 earnings report was well received. The high-volume pullback on March 9 wiped out the whole gain from the previous day, but MOMO got moving again quickly and is now out to new all-time highs. We will keep our recommendation to Buy a Half, but will consider filling the position if we can get a buyable pullback or consolidation. BUY A HALF.

NetEase (NTES) has shown some worrying action since it gapped up to 298 on big volume on February 16. The stock worked its way to above 305 after the strong earnings reaction, but dipped on March 1 and 2 and has been slipping lower since then. If all is well, the stock should find support around 270, which would mean it had given back about two-thirds of its earnings gap. We can be patient with NTES because we have a big profit, but we won’t let too much of it slip away. You can still buy NTES here, and we will tell you if the chart falters. BUY.

Pampa Energia (PAM) looks like it may be ready to move higher, working its way back to its old high of 50, where it peaked on February 3. PAM’s latest move has given it a little separation from its flat 25-day moving average, which is a good thing. BUY.

TAL Education (TAL) began March with a seven-day consolidation over support at 90, and now it has blasted off on a five-day rally to over 95. We have talked about the increased risk on a stock that has had big short- and long-term gains, but TAL is showing considerable strength right now. We’ll keep it on Buy. BUY.

We sold Vale (VALE) in last week’s issue as the stock had pulled back from 11.5 to 9.5. VALE has rebounded, but we never regret following the dictates of our sell disciplines, even when a stock snaps back. Taking a chance that a stock will stop a correction and hanging on past its stop-loss is an invitation to big losses. SOLD.

Weibo (WB) is making progress at repairing the damage from its February 23 free-fall. We put the stock on Hold after that one-day correction and came very close to selling when it dipped into the high 40s last week. But with the stock back above 50, we’re happy to keep it on Hold. We still haven’t seen a good explanation for the big correction that followed what looked like very good earnings news for Sina and Weibo. We’ll give WB a chance to get back on track. HOLD A HALF.

ZTO Express (ZTO xx), which we dropped from our watch list in last week’s issue, has also staged a three-day rally to near 13. We will keep an eye on this rally to see if it’s strong enough to justify picking up coverage again, but we have no shortage of strong stocks to choose from, so it’s a long shot that we will take on a stock with this much volatility. DROPPED.