A Few Liquid Leaders | Cabot Weekly Review

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In today’s market video, Emerging Markets Investor Chief Analyst Paul Goodwin talks about the uncertain state of the market. There is still a technical buy signal, but also a high degree of uncertainty about what the market’s next move might be. It’s a time for caution, but not panic, for cutting back on buying, but not going totally to cash. The investing order of the day is to look for big, well-known names that trade on good volume—these are the stocks that we call “liquid leaders.” Paul points out a few in the U.S. and a few in emerging markets.

Video Transcript

November 13, 2015

Hi I’m Paul Goodwin, Chief Analyst for Cabot Emerging Markets Investor and this is your Cabot Weekly Video Review.

It has not been a great week in the market. Take a look at the S&P 500 here and what you see is a familiar tale: the markets are topping out February through July, the big August 24 free fall right off the face of the earth, the September retest and then this you've got a very encouraging rebound back to about 2,100 for the S&P 500 and now here we are back on the street again below the 200-day, below the 50-day and still around the 25-day, but not an encouraging situation. 

I think the S&P 500 is down slightly for the year. You can see that we're back in the same trading range we've been in since October a year ago. The Dow is pretty much the same as the S&P. The NASDAQ is a little bit different; that’s primarily because it had a much stronger rebound and actually moved out to new highs after the August and September low and retest.  So, now it's still about 25-, 50- and 200-day moving averages. It's what we would call a stock pickers’ market.

This is not the market where you throw a dart and find a winner. This is one where you need to be looking for liquid leaders in the market. You need to be looking for the stocks that are working well, that have the perfect combination of story, numbers and chart, and you need to be very cautious. Do not jump into things. We got through earning season okay—about as many big companies surprised on the downside as surprised on the upside, so it's just a tenuous situation. 

Yes, we're still technically positive, and if you look at EEM, which tracks the emerging market ADRs in the U.S., you see it's still a little bit below it's 25-day moving average. It's technically negative, but it's not terrible to look at.

Here’s the chart of Chinese ADRs that trade on U.S. exchanges. You can see that the rebound in Chinese stocks has been a lot stronger and they're holding up better, and again, it's primarily due to a few great companies that are doing well—and those are the ones you want to be looking for.

So, the number of stocks above their 200-day moving average on the New York Stock Exchange is back down to 29%. It’s fairly pathetic that we have altogether too many stocks that are hitting new lows for the year, which is not a good thing. When that number is above 40, there's something going on in the market.

Let’s look at some of the commodities—here's gold. We'll go to the weekly chart. These charts are from William O'Neill Direct Access Charts. Look at what's happening in gold. This is a long-term trend; from the third quarter of 2011, gold has been down.

What else have we got? Oil was holding up pretty well and then in 2014 goes over the falls. Now go back to the daily, and you can see that every once in a while it tries to stage a little uptrend and just can't do it. Commodities in general are a pretty good proxy for what people think is going to be happening.

So, this is the kind of thing that makes you think everything is absolutely going to hell in a hand basket, but of course the farther the down they go, the closer you get to the bottom. So, the important thing to realize is that the market is under pressure, that global economies are under pressure and that when that happens people are going to move to safety wherever they can find it. Markets are still worried about China, Greece, the FED, etc., etc.—it's an old story, but the important thing is to be looking for stocks that are doing exactly what you want them to, be very careful getting into them and keep your loss limit short. 

Here are a few and these are very familiar names. 

Here's Amazon (AMZN). Amazon had a great quarterly report and you can see this series here: great quarterly report, spikes higher on heavy volume, great report, higher on volume, great report, higher on volume, great report, higher on volume. It's something that’s working really well right now and it's doing well because it's taking business away from other retailers and also moving into the cloud etc., etc. We like the story a lot.

Here's Facebook (FB). You just have to trust the chart and then go look at the story. Facebook had a huge number of new sign ups, it’s working well going global and working hard also to monetize Snapchat and some of its recent acquisitions, so there’s still huge potential there. 

Here’s LinkedIn (LNKD). I can't put this in the same class as the other two. Look at the weekly chart and you can see well, it’s not great. But people have been moving back into LinkedIn recently—and you can see that right here, again, great earnings, gap up and still getting traction from that great earnings report. Our thinking is that LinkedIn is going to do really well when things rebound so people are getting into it in an anticipatory way. 

Here are a few emerging market stocks that I like. This is Grupo Aeroportuario Del Pacifico (PAC)—pardon my pronunciation—it runs 11 or 12 airports across Mexico and it's just doing beautifully.

This is a very strong chart and a name you've been hearing a lot about. It’s Tencent Holdings (TCEHY), one of the largest websites in China. It's got messaging, it's got chat, it's got all kinds of things and it's been using its cash flow to make some great connections with other Chinese online companies so I like that a lot. 

And here’s NetEase (NTES), a game-oriented online Chinese company. You just have to love this big volume spike here, which pushed it out above its previous resistance level. 

So, that’s about it for now. Keep your powder dry. Be more in cash than you would usually be.  Keep your buying under control and always be ready to pull the trigger on selling things, but there are stocks out there to buy. If you'd like to find out more about what Cabot thinks about them, you can always find us at www.cabot.net. Thanks and we'll see you next week.


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