WHAT TO DO NOW: Continue to hold your best stocks, but also hold some cash until our market timing turns positive. This week’s action has been encouraging, but with our Emerging Markets Timer still negative, we have to wait a bit longer before putting cash to work. Tonight, we’re selling our remaining half position in Volaris (VLRS), leaving us with about 35% cash in the portfolio.
Market Environment
Following a couple of solid up days, the market eased today, with the S&P 500 flat at 2,090 and the iShares EM Fund up .23 points to 33.
This week’s action has been encouraging for emerging market (and global) stocks. Following a correction from mid-April through last week, stocks have shot ahead on no particular news, something we find encouraging. Should this rally continue, the past month (which took away less than half of the January-April rally) will have been a normal pause within a new uptrend.
That said, we can’t pop any champagne corks yet. So far, our Emerging Markets Timer remains negative, because the iShares EM Fund (EEM) is still below its 25- and 50-day moving averages. We’ll need to see another 3%-ish rally from here (EEM at 34 or higher) to return us to a buy signal.
Beyond the market action, we remain intrigued by the utter lack of bullishness among investors and all the worrisome headlines floating around. Just this morning, “news” broke that Japan’s Prime Minister Abe reportedly circulated a chart of commodity prices at the G-7, saying the 2014-2016 collapse in prices resembled that of the 2008-2009 implosion, and could foreshadow another rough spell.
As we’ve said before, we never trade based on sentiment, but the pervasive worries from emerging markets investors (and equity investors in general) probably means a lot of people are on the sideline. So if stocks can really kick into gear on the upside, there could be a lot of investors racing to get on board.
For our part, though, we advise sticking to our system. With our Emerging Markets Timer still negative, you should hold some cash and keep new buying relatively small. But you should also hold your best performers and it’s OK to do a little new buying in strong stocks as opportunities arise. We have just one change in our portfolio today; we’re selling our remaining shares in Volaris (VLRS). Details below.
Recommended Stocks
China Lodging Group (HTHT) has stabilized above support in the 32.5 to 33 area, so we’re happy to hold on. It’s not the prettiest chart, but the major trend is up and we think this simple, mass-market story can propel earnings higher for a long time. (Analysts see earnings up 23% this year, which is likely conservative.) We’ll give HTHT a chance as long as it holds up. HOLD.
Credicorp (BAP) has been choppy, but given the market environment, we think the action is solid—the stock continues to find support above its 50-day line. Fundamentally, we think this cheap (12 times earnings), dividend-paying stock (it paid a $2.32 annual dividend two weeks ago) can continue to do well as money flows out of the Brazil mess and into more stable Peru. BUY.
Ctrip.com (CTRP) popped with the market a couple of days ago, which is a positive. But we’re mostly focused on the upcoming earnings report; no date has been set but it should be released within the next week or two. For now, we’ll leave the stock on Buy, thinking CTRP’s long consolidation and successful test of support, along with the company’s fantastic growth story, will lead to higher prices. BUY.
NetEase (NTES) continues to race up the right side of its multi-month consolidation, a positive sign. It’s tempting to hop onboard here, but the stock has resistance in the 175 to 185 range, so we think NTES will probably cool off a bit in the days ahead. Should our timing system turn positive, that will be the time to start a position. For now, keep NTES on your Watch List. WATCH.
New Oriental Education (EDU) looks like it will do well when emerging market stocks kick into gear—shares pushed to new highs on Monday and Tuesday before pulling back. Keep EDU near the top of your Watch List. WATCH.
Seaspan (SSW) tumbled on Tuesday after a relatively large share offering, which is being used in part to redeem some high-yielding preferred stock. Fundamentally, nothing has changed, either with the company or with the dividend (the savings from retiring the preferred should basically make up for the dividends on the new common shares). That said, we don’t want to sound complacent, either. For now, we advise sitting tight, as we expect SSW to find support around here as bargain hunters emerge. If that doesn’t happen, we’ll be forced to sell. HOLD.
Silicon Motion (SIMO) continues to act very well, stretching to new highs this week on good volume. Chip stocks seem to be getting back in gear on the upside, and SIMO appears to be a leader in the group. Hold on if you own some, and if you don’t, you could buy a little here or (preferably) on dips toward 41. BUY.
TAL Education (XRS) has catapulted off its 50-day line this week on excellent volume, which is just what we want to see. XRS (and its peer EDU) aren’t likely to ever be super hot, but the steady, consistent growth of private education in China should keep buyers interested. If you own some, sit tight. HOLD.
Volaris (VLRS) has been a solid holding for us, but we think it’s time to say goodbye—airlines as a whole have been acting poorly for months, and the recent rally in fuel prices probably means profit margins will be crimped in the quarters ahead. VLRS was looking fine through February, but the past three months showed a lot of stalling (distribution) action, and this week’s break of intermediate support (even as the market has rallied) tells us the buyers have left the building. We sold half our shares a few weeks ago, and now we think it’s time to take the rest of our profit off the table. SELL.
Weibo (WB) pushed to recent highs yesterday on good volume. Overall, the stock continues to consolidate normally following its big run. We think WB can be a leading Chinese glamour stock if the market accelerates higher—there aren’t many companies with as unique a story and such large earnings estimates (+72% this year, +69% next year). If you don’t own any, you can buy a half-sized position here. BUY A HALF.
Stock | Date Bought | Price Bought | Current Price | Profit | Rating | |
| China Lodging Group (HTHT) | 3/28/16 | 36 | 33 | -6% | Hold | |
| Credicorp (BAP) | 3/11/16 | 129 | 145 | 13% | Buy | |
| Ctrip.com (CTRP) | 2/26/16 | 42 | 45 | 6% | Buy | |
| NetEase (NTES) | — | — | 177 | — | Watch | |
| New Oriental Education (EDU) | — | — | 42 | — | Watch | |
| Seaspan (SSW) | 6/22/12 | 17 | 15 | -15% | Hold | |
| Silicon Motion (SIMO) | 4/22/16 | 40 | 43 | 7% | Buy | |
| TAL Education (XRS) | 12/18/15 | 48 | 57 | 18% | Hold | |
| Volaris (VLRS) | 9/25/15 | 15 | 19 | 31% | Sell | |
| Weibo (WB) | 4/8/16 | 21 | 24 | 14% | Buy a Half |