WHAT TO DO NOW: The Emerging Markets Timer has turned positive, and we did some buying in a Special Hotline on Tuesday. We will wait to see how the portfolio reacts before we put our remaining 20% cash to work. We’re shifting CTRP to a Hold rating ahead of next week’s earnings.
Market Environment
After a relatively mild correction from April 21 to May 19, the S&P 500 rebounded vigorously, and ran past its long-term resistance at 2,100. The iShares MSCI Emerging Markets ETF (EEM) made a similar move, although its bounce back hasn’t surpassed its April highs yet. But with EEM well above both its 25- and 50-day moving averages and the lower (25-day) average now trending up, we have a clear green light.
It’s worth noting that the PowerShares Golden Dragon China ETF (PGJ), which tracks the performance of Chinese ADRs on U.S. exchanges, isn’t joining in the rally. PGJ’s recovery from the April/May correction was much weaker than either the S&P’s or EEM’s. As the chart below shows, PGJ is sitting right on top of its falling 25-day moving average, which is still below its 50-day. The clear message of PGJ is that investors are being very picky about which Chinese stocks they are willing to bet on. Picking the right Chinese stocks is crucial.
This distinct lack of positive sentiment about Chinese stocks is a good thing for our portfolio, because any improvement in attitudes toward Chinese ADRs will give our holdings a boost. Our strong Chinese ADRs are the outliers at his point, and odds are that any change in sentiment will work to our advantage.
The major indexes slipped lower during the morning session, but despite strengthening in the afternoon, finished the day with minor losses. The Dow fell 20 points (0.11%), the S&P 500 lost four points (0.17%), and the Nasdaq dipped 16 points (0.32%) The iShares MSCI Emerging Markets ETF (EEM) dropped 0.40 points (1.15%) to finish at 34.42.
We will continue to follow our system, which tells us to look for the strongest EM stocks anywhere in the world, as long as they trade on U.S. exchanges. We reacted to the new buy signal by moving NetEase (NTES) off the watch list with a recommendation to take a full position, and filling our position in Weibo (WB) by buying a second half. Here’s how our holdings are doing.
Recommended Stocks
China Lodging Group (HTHT 34) continued a correction that began in April, as the stock was hit with some high-volume selling after its quarterly report on May 12. But buyers moved in quickly and HTHT found support at 33 and recovered to 36 earlier this week, starting the right side of a cup formation. Two days of selling has pulled the stock back to 34, below its major moving averages. Our loss in HTHT is still small, and there’s a possibility that it could resume its recovery. A dip below May support at 33 will likely have us pulling the plug, but we’ll stay on Hold for now. HOLD.
Credicorp (BAP 155) put in a nice base from the middle of April until the end of May, and now it’s starting to move again. BAP enjoyed three days of big gains last week and has continued to inch higher since then. There may be some volatility here as the results of Peruvian elections are tabulated, but there isn’t any downside pressure in evidence. We’ll stay on Buy. BUY.
Ctrip.com (CTRP 41) has seen some big selling on news that two Chinese airlines might cut their commissions to Qunar, Ctrip.com’s business partner. With Ctrip.com’s earnings report scheduled for June 15 (after the close), there is some selling pressure. We are going to be extra cautious and lower CTRP’s rating to Hold until we see the results of next Wednesday’s report. Analysts are looking for a revenue increase of 79.3% in the combined company and an earnings loss of 53 cents per share. HOLD.
After a rally from 130 in late April to 179 at the end of May, NetEase (NTES 171) has relaxed into a reasonable correction. Trading volume, which spiked on the stock’s May 31 inclusion in MSCI’s Emerging Market index has also returned to normal. This looks like normal profit taking and we’ll keep the stock on Buy. BUY.
New Oriental Education (EDU 39) dropped from 43 to 39 on a little over twice its average trading volume on Wednesday. While there’s no single piece of news to “explain” EDU’s correction, there was a lot of generalized volatility at work. And we note that EDU found support right at its 50-day moving average and caught a small updraft today. We will keep EDU on the Watch list for now. WATCH.
Seaspan (SSW 15) gapped down on May 24 after a large secondary share offering. Fortunately, the stock’s rebound from that gap down to below 14.5 has been steady. The company announced today that it will offer shares of its Series G Cumulative Redeemable Perpetual Preferred Shares, a move that the market reacted to with a mild advance. All of Seaspan’s moves are aimed at raising capital for general purposes, like buying back high coupon bonds and newbuild vessels. With the stock now back above 15 and no threat to the stock’s excellent dividend, we’re happy to keep it on Hold. And if SSW can regain its 25-day moving average (now at 15.7), we will likely put it back on Buy. But Hold is the right rating for now. HOLD.
Despite a hiccup last Thursday, Silicon Motion (SIMO 46) remains solidly in its upward trading channel. The stock is staying well above its moving averages and volume is quiet. Chipmakers are doing well as a group, and SIMO is a leader. BUY.
TAL Education (XRS 53) is holding above its support at 52/53, but it looks to be only part of the way through its re-basing process. We will keep XRS on Hold, but any correction below its current support levels will likely see us taking our profit. Hold on for now. HOLD.
Tencent Holdings (TCEHY 23) continues to be a volatile issue in a strong uptrend. Tencent Holdings is making news with its investments in Bitauto (along with Baidu, JD.com and Alibaba) and an increase in its syndicated loan to $4.4 billion. There is a ton of aggressive investment in “new economy” enterprises, and Tencent is a big player. This thinly traded stock has booked three gaps up in the past month, but we can’t argue with its direction. TCEHY is first in line for buying when Chinese sentiment improves. WATCH.
Weibo (WB 28) put in a textbook base, trading sideways from late April through the end of May. The stock’s blastoff on May 27 on heavy volume has cleared the stock to trade in new-high territory. We increased the portfolio’s exposure to a full position on Tuesday. BUY.
Stock | Date Bought | Price Bought | Current Price | Profit | Rating | |
| China Lodging Group (HTHT) | 3/28/16 | 36 | 34 | -4% | Hold | |
| Credicorp (BAP) | 3/11/16 | 129 | 155 | 20% | Buy | |
| Ctrip.com (CTRP) | 2/26/16 | 42 | 41 | -2% | Hold | |
| NetEase (NTES) | 6/8/16 | 175 | 171 | -2% | Buy | |
| New Oriental Education (EDU) | — | — | 39 | — | Watch | |
| Seaspan (SSW) | 6/22/12 | 17 | 15 | -12% | Hold | |
| Silicon Motion (SIMO) | 4/22/16 | 40 | 46 | 13% | Buy | |
| TAL Education (XRS) | 12/18/15 | 48 | 53 | 11% | Hold | |
| Tencent Holdings (TCEHY) | — | — | 23 | — | Watch | |
| Weibo (WB) | 4/8/16 | 21 | 28 | 34% | Buy |