WHAT TO DO NOW: The Emerging Markets Timer is right on the fence, as the MSCI Emerging Markets Fund (EEM) is just a hair below its 50-day moving average, but still well within its recent trading range. Earnings season has claimed its first victim among our holdings, but the portfolio remains in good health. Tonight we’re selling Line Corp. (LN) and moving Tata Motors (TTM) to a Hold.
Market Environment
U.S. markets are continuing their mostly sideways movement, with the S&P 500 trading at its July levels. The Nasdaq, which has been the strongest of the major indexes, has now traded flat since early August. This choppy action with no momentum—either positive or negative—is getting on investors’ nerves, although a consensus is emerging that the Federal Reserve Board is likely to hike rates by a quarter point in December. Add in that we’re in the heart of earnings season and that the presidential election is looming, and it’s a frustrating situation.
The big emerging market news is the IPO of ZTO Express, the second-largest Chinese delivery service. ZTO, which is the official delivery partner of Alibaba and JD.com, expects to realize about $1.4 billion from the offering. The stock traded down 13% from its opening price today. Its continuing reception will give us an interesting test of U.S. investors’ appetite for Chinese stocks.
We’re coming into the heart of earnings season for our stocks. As always, the important thing is to pay attention to the reaction from investors; the numbers, and whether or not they hit their consensus targets, is secondary. Here’s the information we have so far.
The Cabot Emerging Markets Timer is now positive, but just by the skin of its teeth. iShares Emerging Markets ETF (EEM) has been trading sideways since August and is sitting smack on top of its lower (50-day) moving average, so it’s not giving a decisive signal. Accordingly, we’re handling the portfolio on a stock-by-stock basis, with the understanding that earnings will likely be the prime factor in our holdings’ next moves.
The markets made a couple of runs at gains today, but all the major indexes finished down, with the Nasdaq taking the biggest hit. At the close, the Dow fell 30 points (0.16%), the S&P dipped 6 points (0.30%) and the Nasdaq dropped 34 points (0.65%). The iShares MSCI Emerging Markets ETF (EEM) fell 32 cents for loss of 0.86% to finish at 37.08.
Recommended Stocks
Alibaba (BABA) has two big days coming up. The first is its earnings report next Wednesday (November 2) before the market opens. The second important date is November 11, which is Singles Day in China, the biggest shopping day of the Chinese year. Good news (or bad news) on either day could have a big impact on BABA. We’ll keep the stock rated Buy, but wedon’t recommend taking a full position this close to potential watershed days. BUY.
Baozun (BZUN) took a hit on the same three days as BABA (October 11–13), but has held up well since then and is sitting right on its rising 50-day moving average. The company hasn’t released a definitive earnings date, but November 3 is the day of the company’s annual meeting and its Q2 report came out on August 3, so it’s likely to come next week, or soon after. We’ll stay with our recommendation to Hold a Half. HOLD A HALF.
China Lodging Group (HTHT) is mostly staying in the trading range that has caged it since its all-time high on August 29. The stock had a down day today, and is right at its September/October support. With earnings out on November 14 (after the market closes), our Hold rating seems like the right call. HOLD.
Line Corporation (LN) looked like it was trying to bounce last week, but after a disappointing earnings report on Wednesday, the stock has taken a pronounced downturn. It’s time to sell while our loss is minimal. SELL.
Momo Inc. (MOMO) has its earnings report coming up on November 8 (before the open). In the meantime, the stock hit a new all-time high on Tuesday. The stock’s short-term trend is sideways (it’s trading at its early September price after a two-day pullback) but this feels like both a consolidation of its July/August rally and a slack period ahead of earnings. We’ll keep our rating at Buy, but keep it light this close to earnings. BUY A HALF.
NetEase (NTES) is performing beautifully; it hasn’t so much as touched its rising 25-day moving average since September 12. Earnings are set for November 9 (before the open) and investors are looking for revenue of $1.44 billion and earnings of $2.87 per share. You can still buy, but look for a pullback and keep it small. BUY.
Petrobras (PBR) is consolidating a pretty four-week rally that began in late September. With the stock a bit extended after a healthy run, a pause may be called for here. When earnings are released on November 10, the consensus is that Q3 results will show $25.4 billion in revenue and 13 cents per share in earnings. We’ll keep the stock rated Buy a Half until we see the numbers. BUY A HALF.
TAL Education (XRS) reported its latest results this morning and the news was good, with earnings of 70 cents per share and revenue of $271 million. Even more important, the company’s guidance for $227 million to $230 million in revenue in fiscal Q3 was far ahead of analysts’ projections. The stock responded strongly to the news, spiking higher before settling down to a 5% gap up gain. XRS is a bit extended here, so you might consider a partial sell to book some profit. If you’re not in yet, try to buy on a pullback of a couple of points. BUY.
Tata Motors (TTM) was hit yesterday by accusations from the recently ousted CEO of the entire Tata family conglomerate, Cyrus Mistry, who said that big writedowns were on the way because the family refused to let him make necessary changes. Today brought a denial and rejoinder from the family and TTM—after spiking higher at the open—is just a hair above yesterday’s close. The quarterly report for Tata Motors is due “on or before November 15,” but we’re concerned with this public shouting match. We’ll move TTM to a Hold rating until investors make their opinions clearer. HOLD.
Tencent Holdings (TCEHY) has been edging lower for three days, and is sitting on its 50-day moving average. The pullback isn’t especially ominous and hasn’t taken out the stock’s October 13 low. Earnings are due on November 16. We’ll stay on Buy, but keep your purchases smaller than usual. BUY.
Weibo (WB) is continuing the orderly correction that has now reached 13 days since its October 10 high. After a rally that began in February, it’s not unreasonable for the stock to need a break, especially with earnings likely out in the second week of November. We’ll keep our recommendation to Buy a Half. BUY A HALF.
