WHAT TO DO NOW: The iShares EM Fund has been trading mostly sideways since the middle of May, and that has kept the Emerging Markets Timer above its moving averages, but just barely. We have two portfolio moves tonight: Tencent Holdings (TCEHY) is now a Hold and Yum China (YUMC) is a Sell.
Market Environment
There’s plenty of ongoing turmoil and uncertainty in the global scene, but not much in the way of resolution. The North Korea problem is the closest we have to an actual crisis, but even there, inaction looks like the best policy. Everyone is watching the upcoming G20 summit in Germany, but expectations are low for actual progress on global issues. The rest of the headline issues—Brexit, Syria, Washington, D.C. follies—are just on simmer for now. Investors aren’t pleased with the overall situation, but aren’t running screaming for the doors either.
The Cabot Emerging Markets Timer remains positive, but not by much. EEM has traded sideways since the middle of May and is now sitting less than a quarter point above its rising 50-day moving average. We won’t second-guess the indicator, but we don’t see it as a ringing endorsement of the health of the market either. The Golden Dragon Fund (PGJ) is slightly weaker, sitting below its 50-day moving average. This puts both ETFs pretty much in step with the S&P 500 and the Nasdaq, both of which have been trading sideways-to-down since the beginning of June. And while it’s nice to see the Dow holding up a little better, that’s not too meaningful for growth stocks.
Markets opened on the downside and stayed down all day. The change wasn’t big (one percent or less), but the Nasdaq took the biggest hit. At the close, the Dow was down 155 points (0.72%), the S&P 500 fell 23 points (0.93%) and the Nasdaq dropped 61 points (0.04%). The iShares MSCI Emerging Markets ETF (EEM) retreated by 0.51 points (1.23%), to finish at 41.04.
Recommended Stocks
Alibaba (BABA) is still consolidating its June 8 gap-up from 125 to 143. Trading volume has been declining and the stock has pretty much ignored the ups and downs of the rest of the emerging market universe. The stock gave back some of its gains in the week following its big move, but has tightened up again under resistance at 145. We will stay on Buy, but with the market under some pressure, try to buy on normal dips. BUY.
Autohome (ATHM) has been calmly consolidating under resistance at 46 since early June, but is showing signs that it might be ready to move again. Over the last five days, ATHM has booked a string of small advances and finished today just above that resistance. It’s not a breakout yet, but all the signs are there. BUY.
China Lodging Group (HTHT) has been tightening up since its mid-June slide from 88 to 75. Five days of heavy-volume buying starting on June 21 have reinforced the stock’s consolidation. This is one of our longest holdings (first bought March 2016) and this pause is perfectly in character with its long-term pattern. If you don’t own HTHT, you might want to wait until the market picks up some energy, but we’ll keep it on Buy. BUY.
HDFC Bank (HDB) has been running all year, and is taking a rest under resistance at 89. This looks like a normal consolidation for HDB and we will keep it rated Buy. BUY.
We sold half of our position in JD.com (JD) last week after a period of jerky up-and-down trading that was out of character after an orderly run from 26 in January to 44 in early June. The stock has now made zero net progress since early May, and trading volume on both up and down days has been heavy. With a nice profit booked on the sale of half our position, we can be patient with our remaining shares, which looks to have support at 38 (which is also the top of the stock’s May gap up). We will keep our half position rated Hold. HOLD A HALF.
LG Display (LPL) has been quite volatile since the middle of June, advancing to 17 on June 13, June 27 and July 5, but immediately retreating to support at 16. LPL has always been a bit jumpy, but support at 16 seems solid and the stock’s rising 25-day moving average—now at 16—should provide some lift. We will keep our half position rated Buy. BUY A HALF.
After a six-day slide from 24 to 21.5 after the release of softer-than-expected Macau gaming revenue numbers for June, Melco Resorts (MLCO) has had a couple of days of tight trading as light buying has shown up. The stock wasn’t hit as hard as some of its Macau competitors during this period. If you have a profit, we advise just holding on. We’ll keep the stock rated Buy, but advise taking only a small position until the stock shows more upside movement. BUY.
TAL Education (TAL) isn’t making much progress, but has ridden its 50-day moving average from 115 to 124 in fine style, with a couple of higher-volume buying days along the way. We won’t go back to a Buy rating until we see the stock make a run at its May/June resistance above 130, but with plenty of profit already booked, we’re happy to hold our half position. HOLD A HALF.
Many Chinese stocks are experiencing heightened volatility, and Tencent Holdings (TCEHY) is certainly one of them. The stock started a sideways move in May, then looked like it was ready to get going after hitting a new high at 37 on June 27. But the stock gapped down on Wednesday and is now sitting right on its rising 50-day moving average. There’s no news, bad or otherwise, to explain this bout of weakness, just the general weakness of Chinese ADRs. But the stock has always experienced big pullbacks after rallies. This might look like a buying opportunity if we had bullish market momentum on our side. But as it is, we will shift the stock’s rating to Hold and watch closely for unusual weakness. HOLD.
Weibo (WB) was sold in last week’s issue following a drift lower from its May 19 high above 82 to a low of 66 last Thursday. It may be that the company’s run-in with Chinese regulators soured investors on the stock. We exited with a profit of around 25%. We will keep WB on our watch list, as the story is as attractive as ever. SOLD.
Yum China (YUMC) reported its latest quarterly results on Wednesday after the close, and the results were disappointing. Revenue came in slightly below expectations ($1.59 billion versus analysts’ estimate of $1.60 billion), with underperformance at the company’s Pizza Hut franchises primarily at fault. On the plus side, same-store sales rose 3%. Nevertheless, the stock fell sharply at today’s open and plowed lower all day. This correction leaves our half position with a slight profit, but the stock will need a lot of time to repair the damage, so we’ll sell and hold the cash. SELL.
