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Cabot Emerging Markets Investor Bi-weekly Update

The Cabot Emerging Markets Timer remains negative, counseling us to stay defensive. We have two changes in the portfolio today; Baidu (BIDU) is changed from Hold a Half to Sell and Sinovac Biotech (SVA) is shifted from Watch to Drop.

WHAT TO DO NOW: The Cabot Emerging Markets Timer remains negative, counseling us to stay defensive. We have two changes in the portfolio today; Baidu (BIDU) is changed from Hold a Half to Sell and Sinovac Biotech (SVA) is shifted from Watch to Drop.

Market Environment

Global equities have recovered slightly from their January 20 low, but the momentum of the market is very much in play. With earnings season in high gear in the U.S., volatility among individual stocks is high. Markets are likely to remain touchy, as the Fed has essentially ruled out further rate increases for the year, which is an admission that economic growth rates are uncertain. China is still the biggest element of uncertainty in the global economic outlook, and will likely remain so through 2016.

The iShares MSCI Emerging Markets ETF (EEM) has actually fought its way back above its 25-day moving average, but that average is still trending down, which keeps the red light flashing for the Cabot Emerging Markets Timer. The next six trading days will see the worst of the January correction falling out of the 25-day moving average, so if markets hold up, we might get a new buy signal within a week or two. For now, we’ll stick with what our timing indicator is telling us, which is to remain cautious and curtail new buying.

The Shanghai Composite has been through four distinct phases in the last five months. First, it stabilized in September 2015 after the August global meltdown. Second, it rallied in October and early November. Third, it traded flat under resistance in November and December. Fourth, it corrected sharply in January. The Shanghai may have started putting in a bottom in the past five or six days, but it’s too early to tell. What’s clear is that big moves on the Shanghai Exchange can affect U.S. markets, and the world is paying close attention to the Chinese government’s efforts to stimulate its economy.

Just one of our holdings (TAL Education) has reported Q4 results (it reacted very well), and two others have announced firm report dates: Volaris (VLRS) on February 22 before the market opens and NetEase (NTES) on February 24 after the close. Those results are likely to be major factors in how our stocks move over the next month. We’ll keep you apprised of confirmed reporting dates as we find them.

The major indexes rallied strongly during the early morning, but meandered higher and lower for the rest of the day, finishing narrowly higher. At the close, the Dow was up 75 points (0.46%), the S&P 500 inched up 3 points (0.13%), and the Nasdaq ticked up five points (0.12%). The iShares MSCI Emerging Markets ETF (EEM) gained 23 cents (0.76%).

Recommended Stocks

Baidu (BIDU 153) has continued its steady correction that began on December 1. We would like to hold BIDU through its quarterly report—probably out next week, although no official date has been named—but we have given it all the slack we can. If the results are good and the stock rebounds, we will consider putting it back in the portfolio. But loss limits are too important to our process to fudge them by much. We will sell our half position in BIDU and hold the cash. SELL.

Concord Medical Services (CCM 4.9) had an interesting January, falling from over 5 as the month began to 4.3 when the market bottomed on January 20. Since that low, CCM has bounced back to near 5, forming a nice “V” pattern. We won’t take any action on CCM while our timing indicators are negative (and before the company reports its Q4 results). We’ll keep it on the watch list. WATCH.

Grupo Financiero Galicia (GGAL 28) continues to hold well within the trading range it has occupied since late October. This is good base-building behavior as we wait for the market’s next move. We’ll keep GGAL on the watch list. WATCH.

NetEase (NTES 151) has been slipping lower since it stumbled in early January. The stock is right on the edge of our loss limits, but is holding well above its 200-day moving average (which puts it ahead of four out of five stocks). We’d like to hang on to our half position in NTES until the company’s Q4 earnings report on February 24 (after the close), but won’t do so if it triggers our loss limit. HOLD A HALF.

Seaspan (SSW 16) was spiking higher in January as the market was spiking lower. The stock shot up from 14 to 16 in just four days and has held those gains since then. No news yet on quarterly report dates, but Q3 results came out on November 2, so it’s got to be soon. We will hold SSW for both its price action and its generous dividend. HOLD.

Sinovac Biotech (SVA 7.1) has blasted off on rising volume as the company has received a competing proposal to take it private that values its stock at 7 per share. Buyouts like this one aren’t something that can be predicted or played, and with the stock’s upside limited, we’ll drop the stock off our watch list. DROP.

TAL Education (XRS 48) reported solid quarterly results a week ago and investors registered their approval. The stock pushed out to new all-time highs close to 50 earlier in the week, and is off just a couple of points from there. If we had support from the market, we would advance XRS to a Buy, but we won’t fight the tape right now. HOLD A HALF.

Volaris (VLRS 17) isn’t strong, but it has found support at 16 three times since last November. The company just announced its January preliminary traffic results, which showed a 22.2% jump in total capacity, year over year, and a 31% jump in traffic. We’ll hold VLRS as its February 22 quarterly report date approaches. HOLD.

Weibo (WB 15) is walking right along the cliff edge, holding just above our loss limit after a nice bump higher today. We love the story and the company’s decision to expand its character limit for posts to 2,000. Quarterly results probably won’t be out until early March, so we will keep the stock on a very tight leash and make our decisions based on price action. HOLD A HALF. (YY 56) closed at 55 on the market’s January 20 nadir, and is retesting that level in recent trading after rallying as high as 60 on January 21. Ideally, YY will hold support at 55 while the market looks for a bottom. WATCH.

Baidu (BIDU)11/6/15 198153 -23%SELL
Concord Medical Services (CCM)4.9Watch
Grupo Financiero Galicia (GGAL)28Watch
NetEase (NTES)12/4/15175 151 -14%Hold a Half
Seaspan (SSW)6/22/121716 -6%Hold
Sinovac Biotech (SVA)7.1Drop
TAL Education (XRS) 12/18/1548 49 -1%Hold a Half
Volaris (VLRS) 9/25/15151713%Hold
Weibo (WB) 10/23/15 1615-11%Hold a Half (YY) 56Watch