WHAT TO DO NOW: The Emerging Markets Timer is flashing a buy signal and our stocks are behaving well. Our only move tonight is buying a half position in New Oriental Education (EDU).
Market Environment
It’s been an enjoyable couple of weeks in the market, with the S&P 500 recovering from its two-day post-Brexit swoon in just four trading sessions and then staging a strong rally to new all-time highs. The Dow did the same. And while the Nasdaq hasn’t actually cleared its 2015 highs, the index’s recovery from its recent lows is robust. So it’s unanimous; the U.S. stock market is in a bull phase, which creates a supportive environment for growth stocks.
But—and you knew there had to be a “but” coming—while the Cabot Emerging Markets Timer is indeed flashing a green light, the iShares MSCI Emerging Markets ETF (EEM) has made up only half of its April 2015-through-January 2016 correction. And in the long term, EEM is still locked in a flat spell that dates back to late 2009. Here’s a monthly chart to illustrate. (Note also the boom years for emerging market stocks and the recovery from the Great Recession … then flatness.)
Accordingly, while the buy signal from the Emerging Markets Timer is important, and could finally mark the start of a sustained uptrend, stock selection is still key. With the long-term trend sideways, identifying and buying the leaders is crucial.
The markets headed down most of the day, and finished modestly down despite a mild rally in the last hour or so of trading. At the close, the Dow was down 78 points (0.42%), the S&P 500 dipped 8 points (0.36%), and the Nasdaq fell 16 points (0.31%) The iShares MSCI Emerging Markets ETF (EEM) paralleled the market, losing 0.115 points (0.32%) to finish at 35.71.
Recommended Stocks
Anglogold Ashanti (AU 21) is taking a breather, but hasn’t even given up a full point of its June–July rally. Gold tends to move inversely with the major indexes, but we see no reason to either back off from AU or to buy more. We have exposure to a major trend in precious metals, which is what we want. So, we will stick with our recommendation to buy a half position. BUY A HALF.
China Lodging Group (HTHT 39) put the finishing touch on its short-term rally last Friday with a surge to near 42. The stock has now pulled back to near 39, which looks normal to us. The stock’s rising 25-day moving average is a little under 37, so it’s not really extended. We’ll stay on Buy. BUY.
Credicorp (BAP 159) has been tightening up under resistance at 160. There’s not a thing wrong with this chart, which reflects that investors’ attitude toward the stock remains healthy. We will likely go back to a Buy rating when the stock breaks through resistance. For now, we’re fine with holding on. HOLD A HALF.
NetEase (NTES 197) picked up coverage from a new analyst (Brean Capital) on Monday with a buy rating. With earnings likely out in the second week of August, it’s prudent to keep any new positions small. But with that said, any dip to 195 would present an attractive buy point. BUY.
New Oriental Education (EDU 44) had a great day yesterday following a well-received quarterly earnings report. The company reported revenue, earnings and enrollment figures that exceeded expectations and the stock jumped to new highs at 45. EDU was quiet today, hanging around at yesterday’s close. EDU has traded pretty much in-step with XRS over the past year, but we see no problem with owning two Chinese educational stocks, as the industry is strong and owning both can actually lower risk a bit. We’ll shift our recommendation on EDU to Buy a Half. BUY A HALF .
Silicon Motion (SIMO 54) has been rallying since the beginning of the year, sometimes consolidating, but then returning to its upward trend line. That’s what happened in June, as the stock paused for a few weeks, then sprinted in late June and early July to get back to its upward trading channel. Silicon Motion will be reporting quarterly results after the market closes today, so we will be watching very closely. The company has already given preliminary results, so surprises are unlikely, but the company will also set expectations for the coming quarter, which will be key. We’ll keep SIMO on Buy, but keep an eye on the response to earnings tomorrow. BUY.
TAL Education (XRS 64) has made up its early July correction, nudging 64 yesterday. The big news will come on July 26 (next Tuesday) when the company releases its Q2 results before the market opens. Analysts are forecasting earnings of 29 cents per share and revenue of $184 million. Again, taking a full position this close to an earnings date gives you maximum risk with little chance for a profit cushion, so you should either dial back your buy or wait for the reaction to the results. We’ll keep the stock rated Buy. BUY.
Telkom Indonesia (TLK 63) began its current rally in October 2015. During 2016, the stock has made frequent pullbacks to its rising 25-day moving average, but only tagged its 50-day moving average in March. That’s why we’re not really concerned about the stock’s pullback to just under 63. With TLK’s 25-day at 61.3, this correction is completely in character with the stock’s recent history. Earnings are likely out next week or the first week in August, so we’ll keep our recommendation to buy a half position. BUY A HALF.
Tencent Holdings (TCEHY 24) hasn’t closed below its 50-day moving average since May, and only dipped below its 25-day once (during the Brexit retreat). The stock has been playing with new all-time highs all month, and nicked 24 on Wednesday. The company hasn’t scheduled its earnings release yet, but it will likely come in the second week of August. This looks like a good buy on any weakness of a half a point. BUY.
Weibo (WB 33) has been a real tractor since the middle of February, advancing steadily, then idling for a month or so, then surging anew. Earnings aren’t scheduled, but will likely come in mid-August. There’s not a thing wrong with the stock, which has been alternating up and down days since its July 7 jump, but making steady progress. Use one of the down days to get started on a position. BUY.
Yirendai (YRD 22) built a base-on-base from April through June (10 to 15 in April and early May, then 13 to 16 from then until early July). The breakout that began on July 12 has pushed YRD higher, while leaving its 25-day moving average behind at 16. We think YRD is buyable here, but with earnings possibly out before the end of July, we’ll stick with our recommendation to buy just a half position. BUY A HALF.
Stock | Date Bought | Price Bought | Current Price | Profit | Rating | |
| AngloGold Ashanti (AU) | 7/1/16 | 10 | 21 | 12% | Buy a Half | |
| China Lodging Group (HTHT) | 3/28/16 | 36 | 39 | 104% | Buy | |
| Credicorp (BAP) | 3/11/16 | 129 | 159 | 23% | Hold a Half | |
| NetEase (NTES) | 6/8/16 | 175 | 197 | 13% | Buy | |
| New Oriental Education (EDU) | New | — | 44 | — | Buy a Half | |
| Silicon Motion (SIMO) | 4/22/16 | 40 | 54 | 33% | Buy | |
| TAL Education (XRS) | 12/18/15 | 48 | 64 | 32% | Buy | |
| Telcom Indonesia (TLK) | 7/1/16 | 62 | 63 | 1% | Buy a Half | |
| Tencent Holdings (TCEHY) | 6/24/16 | 22 | 24 | 6% | Buy | |
| Weibo (WB) | 4/8/16 | 21 | 33 | 60% | Buy | |
| Yirendai (YRD) | 7/15/16 | 20 | 22 | 10% | Buy a Half |