FALLS CHURCH, Va.—The rally that commenced a week ago has taken many investors by surprise, and I’ve been asked repeatedly over the past few days whether now is the time to sell. The answer is no.

I understand why folks are asking the question; Asia has shot up around 30 percent this week after a dreadful October, while the economic environment is still deteriorating and earnings and GDP forecasts are being revised downward in a hurry.

But this rally can establish real momentum and last for sometime because the markets are coming back from extremely oversold levels, stocks are at low valuations and most investors are quite pessimistic.

China and South Korea have been leading the rally so far, with India and Hong Kong right behind. China has topped the Fresh Money Buys list since mid-September, and I reiterated the case for it being your first destination for new capital in a Flash Alert last week.

The long-term China investment story is based on the fact that the country’ leadership is moving steadily toward economic integration with the global financial system. It’s also laying a foundation for strong domestic economic growth.

The prevailing thinking these days about China is that the “story is over” because the country won’t be able to withstand a global recession next year, and that its growth will collapse as exports suffer.

But China is following through on a plan that was mapped out years ago. In the short term, Chinese authorities are stepping in to support consumption and have committed to infrastructure spending as a means of keeping growth in 2009 of around 8 percent. (See Silk, 17 September 2008, China Is the Word.)

Looking out longer term, they’ve launched plans to push the country’s manufacturing up the so-called value added chain in order to contribute more to growth and create higher-paying jobs. The decision was made long ago that many small, pollutive manufacturers will be closed down. For some, taking away the returns on value-added taxes has been doing the trick.

Furthermore, the rural part of the country is now the main focus of economic development. The party leadership is working toward bringing more of the spoils of economic growth inland.

It’s surprising that there remains such widespread doubt about the ability of the Chinese to move forward with the modernization of their economy. Looking back, it’s fairly clear that the country has moved in deliberate, stable steps in the direction of economic development.

It was around 30 years ago when the country abandoned its collective agriculture scheme and began to orient its economy around wages. Special economic zones were created, and foreign companies established manufacturing operations using cheap labor provided by the Chinese. These factories produced the cheap products to which Western consumers would soon become accustomed to buying, in the process increasing their consuming power while enjoying lower inflation.

In the 1990s the Chinese made their second big decision: In a very short time many state-owned enterprises were closed, providing opportunities for entrepreneurs to flourish. In just six years 46 million people were laid off, the government stopped setting most prices in the economy and the great privatization of urban housing was also underway.

There will be many twists and turns for the Chinese economy as well as its society, but it’s gradually becoming clear that China’s model of development has worked well. And there’s no reason it won’t work in the future. The country’s adaptability to the changing world seems extraordinary–although it helps if you’re one of the main drivers of these changes.

China can continue to lead the rally, and I also expect Hong Kong to perform well, too. Indonesia could also be a strong performer going forward because it remains relatively undervalued. (See Silk, 29 October 2008, Asia’s Bargain Bin.) As I mentioned in last week’s Flash Alert, the Russian market should also be a big beneficiary if this rally maintains the strength it’s currently showing.

That said, I won’t alter the Portfolio to make the most out of the bounce– i.e., we won’t trade in and out of positions based on technical indicators. The Portfolio is long-only, long-term-oriented, meaning I’m identifying good companies positioned to benefit from the best investment themes.

Readers interested in playing the momentum can use the exchange traded funds in the Alternative Holdings, employing the Fresh Money Buys list as a guide to gaining comprehensive exposure to the markets I like now.

I have made one Portfolio change, placing a sell recommendation on Singapore Telecom (OTC: SGAPY).

We still have plenty of telecom exposure, and funds from the sale of SingTel should be allocated to Mobile TeleSystems (NYSE: MBT), Philippine Telephone (NYSE: PHI), and PT Telekom Indonesia (NYSE: TLK).

The investment process is constant. If you’d like to add to your positions in portfolio recommendations or allocate new funds in a diversified way, focus on the following markets, in order (for both countries and sectors). Consult the Portfolio tables for details.

• China (machinery, Consumer, Insurance, Banks, coal, port, e-commerce)
• Hong Kong (real estate, banking)
• Russia (energy, telecommunications)
• India (pharmaceuticals)
• Japan (banking)
• Philippines (telecommunications)
• Taiwan (ETF)
• Indonesia (Telecom)
• Singapore (Industrial, telecommunications)
• Vietnam (ETF)
• Cambodia (casino/hotels)
• Macau (casino/hotels)