WHAT TO DO NOW: The Emerging Markets Timer is doing just fine, as the iShares EM Fund has rebounded from its May 17–18 dip. Our only portfolio move tonight is to sell half of our position in Momo Inc. (MOMO) and hold the rest.
Market Environment
The biggest news of the week for emerging markets investors was the downgrade of China’s credit rating by Moody’s from Aa3 to A1. Moody’s said it took the action because of worries about China’s debt. China responded that reform efforts would keep debt in check. But Moody’s is just seeing what the rest of the world sees, which is that China’s efforts to stimulate its economy to reach its target of 6.5% growth this year will be expensive. Global markets stumbled after the downgrade announcement, but recovered quickly. After all, the rating is still solidly investment grade, so the effect on the global appetite for Chinese bonds shouldn’t be hit badly.
Everything that we say about the stock market this week needs to be understood against a backdrop of what happened last week on Wednesday and Thursday (May 17 and 18). That’s when additional revelations from Washington, D.C. (and then Brazil’s downturn) caused global markets to take a sudden plunge that set off alarm bells. And even though the major indexes have mostly recovered every bit of the loss, it seems that investors are still apprehensive, as if they’re looking over their shoulders despite the market’s rebound. Here’s what the event looked like.
You can see that iShares MSCI Emerging Markets ETF (EEM), which had been pulling away from its rising 25- and 50-day averages, dipped on the 17th and fell below its 25-day on the 18th, stopping just above its 50-day. By Friday, EEM had recovered two-thirds of its correction and has been inching higher since. This means that our buy signal is still intact. The Golden Dragon ETF (PGJ) that tracks Chinese ADRs never came near its 25-day moving average and pushed out to new highs on Tuesday.
We got through earnings season in pretty good shape, although the fate of MOMO is still in the balance. So we can go back to watching the usual economic indicators and political stories to get a sense of what’s happening. It wouldn’t be a surprise to see a slowdown or a correction soon, but we don’t predict that kind of thing; it’s just what happens during long rallies.
Markets were up across the board today, with the Nasdaq leading the way. At the close, the Dow was up 69 points (0.33%), the S&P 500 gained 11 point (0.44%) and the Nasdaq rose 42 points (0.69%). The iShares MSCI Emerging Markets ETF (EEM) gained 0.19 points (0.46%), to finish at 41.58.
Recommended Stocks
On May 10, Alibaba (BABA) celebrated its conquest of its old high at 120, which dated back to November 2014, a couple of months after its headline-making IPO. The company’s excellent earnings report on the morning of May 18 was strong enough to counteract the effects of the market’s weakness, and BABA made an upswing of more than seven points from its intraday low. Investors are paying more attention to the company’s announcement of a $6 billion share buyback than to its slight miss on earnings estimates. Look for a pullback of a couple of points to get started. If you already own it, just sit tight. BUY.
It took Baozun (BZUN just five trading days in May to jump from 15 to 23, and the stock completely ignored the May 18 dip in the market. So it’s not a surprise that the stock has taken a little breather. We like the story and the stock’s 10-week basing structure from February through April. BUY A HALF.
China Lodging Group (HTHT) had four days of unusually high trading volume from its quarterly report day (May 10) through the following Monday (May 15). But the stock itself hasn’t really made a big price move. It’s up about three points from its close at 75 on May 10, the day earnings came out after the close. Big volatility after a big run can be a warning sign, but so far HTHT looks to be moving quietly higher. BUY.
JD.com (JD) has followed through on its May 8 gap up, just grazing the 42 level on Monday and Tuesday before falling back a point. The latest news for JD.com has been about the company’s plan to create a robot drone that can deliver payloads of up to one ton. The project, when complete, should increase JD.com’s ability to make deliveries in rural and remote areas. The two-day correction has provided a buying opportunity. BUY.
LATAM Airlines (LTM) fell hard on May 16 and 17 and gapped down to 11 on the 18th, when Brazil imploded. We recommended selling it in last week’s issue. LTM has barely been able to bounce, and will need to do lots of work to get back to its previous range. SOLD.
Melco Resorts (MLCO) has been moving sideways between 21 and 22 since it had its three days of high-volume ups and downs earlier this month. The stock should be well along in the process of digesting its recent share offering. We’ll keep MLCO rated Hold, but we expect the arrival of its 50-day moving average (now near 20.5) should provide some lift if all is well. HOLD.
Momo (MOMO) is the biggest puzzle in the portfolio. The company’s quarterly report on Tuesday morning killed analysts’ estimates, with 633% growth in EPS and 421% revenue growth. Forecasts are for 77% earnings growth in 2017 and 40% in 2018. But there’s no use telling a stock what it ought to be doing. We will book a partial profit in MOMO by selling half of our position and move the rest to a Hold rating. MOMO’s correction has scrubbed almost 10 points off its price from its May 22 high. We’ll lower our exposure and keep the other half on a short leash. SELL HALF, HOLD THE REST.
Pampa Energia (PAM) started to trade sideways on April 11, and stayed under resistance at 60 until yesterday. And today it’s pushed above 62. Nice action, as the stock has twice received a boost from its 25-day moving average. The stock has had a great run, but this move up from a new base looks good. BUY.
TAL Education (TAL) sold off on huge volume on May 15. Then, on the 16th, it hit a new high on even higher volume. Since that high, TAL has been under moderate selling pressure, but trading volume has been ramping down in an orderly way. We sold half of our position in last week’s issue, and we’re happy to hold the other half while TAL works through this churning action. HOLD A HALF.
Tencent Holdings (TCEHY) is always a little skittish, but trading volume has ballooned over the last couple of weeks as more and more investors discover it. The company’s Q1 earnings release was strong across the board, with 45% revenue growth and 38% earnings growth and a 28.7% after-tax profit margin. You can use the stock’s volatility to get in on a pullback of a point or so. BUY.
Vedanta (VEDL) continues to trade sideways with support at 14 and resistance at 16. We’ll keep it on the Watch list for now. WATCH.
Weibo (WB) enjoyed a big gap up move on enormous volume on May 16 after its earnings report crushed analysts’ expectations. The stock has been a bit volatile since the report, but made a new all-time closing high on Monday. We will stick with our Buy a Half rating and will consider filling out the position when the time is right. BUY A HALF.
Yum China (YUMC) took a three-week breather in early May, but has soared since it defied the broad market and broke out higher on May 18. We’ll wait for a reasonable pullback to fill out our position. We’ll keep it rated Buy a Half for now. BUY A HALF.
