WHAT TO DO NOW: The Emerging Markets Timer is still pointed up, but it’s clearly seen some selling volume over the last week. So while we’re still bullish, we’re not looking to push for further exposure at this point. The only change in the portfolio is the sale of Telkom Indonesia (TLK) that we recommended in a Special Bulletin on Wednesday.
Market Environment
U.S. markets came under some selling pressure last Friday, and the buyers and sellers have been battling it out ever since, with big swings from day to day and elevated volume. Fear of the consequences of a possible rate increase from the Federal Reserve is the most common reason given for the selling, but it seems to us that the market may just have needed a breather after a long rally. Systemic nervousness about U.S. politics, Brexit analysis and other headline shocks may also be playing a part.
The Cabot Emerging Markets Timer is still showing a green light, but iShares MSCI Emerging Markets ETF (EEM) was actually below its 50-day moving average on Tuesday and Wednesday before today’s rally gave it a boost. All in all, the situation is a little unsettled, but our stocks are acting well, so we’re inclined to mostly keep our hands off the sell button. But you should recognize that things are a little edgy right now and keep a close eye on your own loss limits.
The markets surged higher this morning and advanced again in the afternoon session to finish the day with solid gains. At the close, the Dow gained 178 points (0.99%), the S&P rose 22 points (1.01%) and the Nasdaq climbed 76 points (1.47%). The iShares MSCI Emerging Markets ETF (EEM) gained 0.63 points (1.74%) to finish at 36.77.
Recommended Stocks
Alibaba (BABA 104) continues to undergo a rehabilitation of its reputation with emerging market investors. After languishing for nearly two years under the burden of lowered expectations about China’s economy and the memory of its post-IPO bust, Alibaba has finally convinced the world that it’s a going, growing concern. BABA is trading above 100 for the first time since January 2015, several analysts have upgraded their ratings and the company is using its huge cash horde to acquire complementary businesses and form joint ventures. The outlook is excellent. Something can always go wrong, of course, but the reality on the ground is that BABA is thriving right now. BUY.
Baozun (BZUN 14) corrected sharply last week, but has rebounded this week. There hasn’t been any news and the stock is sitting well above its rising 25-day moving average. We’ll stick with our recommendation to Buy a Half position. BUY A HALF.
China Lodging Group (HTHT 46) experienced a few days of big positive volatility in the middle of August after its earnings report, then rallied ahead to an interim high of 48 on August 29. HTHT pulled back a bit after that rally, and has been inching back higher for the past couple of weeks. With the stock around 46 and the rising 25-day moving average at 44, we expect the stock to pick up some new energy when the 25-day meets the stock price. We’ll stay on Buy. BUY.
Line Corporation (LN 44) is tightening up between 43 and 45, which is a good sign for a stock that hasn’t had much of a post-IPO correction. We’ll keep our recommendation at Buy a Half. BUY A HALF.
MercadoLibre (MELI 175) has developed a pattern over the last three months of making rapid gains, then trading sideways to down for a few weeks. The rally that began on July 7 and the gap-up gains on August 5 and September 2 were all followed by this kind of consolidation. MELI has been correcting a little more steeply than usual since the September 2 jump, possibly due to the market, and is now sitting right on top of its 25-day moving average, which has also flattened out. The fundamentals are sound and the longer-term chart shows a rally that has been steaming along since February. We continue to think that this is a buyable correction. BUY.
On Monday, NetEase (NTES 237) broke decisively above its August resistance at 216–218. The breakout came on heavy volume and the stock has continued higher since then. Again, there isn’t a particular piece of news that fueled the sprint from NTES, but the whole Chinese e-commerce, online games and everything internet sector has been hot recently. We’ll keep the stock on Buy, but try to get in on dips of a few points. BUY.
Silicon Motion (SIMO 51) is now retreating from its third run at resistance at 56, which is a concern. We’ve taken partial profits in our SIMO position (and it’s made a trip to the Hold list and back to a Buy a Half rating), so we’re inclined to be patient as the stock builds a new base. SIMO made an uncharacteristically rapid advance in late June and early July, so some consolidation wasn’t unexpected. We will maintain our Buy a Half rating for now. BUY A HALF.
TAL Education (XRS 70) broke out above its old resistance at 66 today, completing its recovery from its late-July correction. The overarching narrative for TAL is likely the end of China’s one-child policy, which has the potential to create a baby boomlet. The numbers aren’t yet in on the scale of the potential baby wave, but investors are getting in line. If XRS maintains its momentum, we’ll likely put it back on Buy. For now, Hold is the way to go. HOLD.
Telkom Indonesia (TLK 63) rebounded nicely today, marking a useful bounce for our decision to sell the stock in a Special Bulletin yesterday. If you haven’t sold TLK, use this bounce as a selling bonus. SOLD.
Tencent Holdings (TCEHY 28) continues to bounce around, but the trend is clearly up, a tendency that is confirmed by today’s gap up on heavy volume to near 28. Tencent is a leading mover and shaker in the Chinese digital world, and investors have been buying eagerly since May. BUY.
After an energetic rally that began in February, Weibo (WB 49) is a clear leader among Chinese ADRs. The mild correction that began on September 7 was kind of a relief, pulling the stock back to its 25-day moving average and giving investors a reasonable buy point. WB has been up modestly over the last two days, but it’s still a few points off last week’s high near 52. We’ll keep our recommendation to Buy a Half. BUY A HALF.
Stock | Date Bought | Price Bought | Current Price | Profit | Rating | |
| Alibaba (BABA) | New | 97 | 104 | 8% | Buy | |
| Baozun (BZNU) | 9/9/16 | 14 | 14 | 5% | Buy a Half | |
| China Lodging Group (HTHT) | 3/28/16 | 36 | 46 | 30% | Buy | |
| Line Corp. (LN) | 8/26/16 | 43 | 44 | 3% | Buy a Half | |
| MercadoLibre (MELI) | 8/11/16 | 170 | 175 | 3% | Buy | |
| NetEase (NTES) | 6/8/16 | 175 | 237 | 36% | Buy | |
| Silicon Motion (SIMO) | 4/22/16 | 40 | 51 | 26% | Buy a Half | |
| TAL Education (XRS) | 12/18/15 | 48 | 70 | 46% | Hold | |
| Telcom Indonesia (TLK) | 7/1/16 | 62 | — | — | Sold | |
| Tencent Holdings (TCEHY) | 6/24/16 | 22 | 28 | 24% | Buy | |
| Weibo (WB) | 4/8/16 | 21 | 49 | 136% | Buy a Half |