Expert technical analysis of financial markets by JC Parets
In this week’s members-only letter we discuss the following topics:
Dear Readers,
We have to trade and invest in the market that we have in front of us, not the one that we want. Therefore we have to be able to approach the market from a completely unbiased perspective. We don’t care if the market doubles in price or if it gets cut in half. We want to try to take advantage of moves in both directions. This is America after all.
I know it’s not sexy, but since October 23rd, we have wanted to approach the major U.S. stock market averages from a more neutral perspective. This is the day that both the S&P500 and the Dow Jones Industrial Average first got above what was then, and still is, a flat 200 day simple moving average. Securities in that sort of environment create headaches, for both the bulls and the bears. The reason is because [Read more…]
One of the biggest themes for me over the past few years has been the consistent underperformance out of Emerging Markets relative to U.S. Stocks. This is the exact opposite of what had been such a nice trend for so many years. From 2003-2007 Emerging Markets were where you wanted to be, and not the United States. But since then we have seen a tremendous bottoming out of that trend where now it’s the US hitting fresh 9-year highs relative to Emerging Markets and it’s Latin America that is a big part of the reason for this struggle.
First of all, here is a long-term chart of the S&P500 vs Emerging Markets. We are using SPY to represent the U.S. and EEM to represent the MSCI Emerging Markets Index, which consists of 21 Emerging Market countries. These include China, South Korea, Taiwan, India, Brazil etc. Look at the nice bottoming process and structural breakout (and successful retest) earlier this year:
Next, here is the chart of Latin America vs Emerging Markets. We are using ILF which represents the S&P Latin America 40 Index which has 52% Exposure in Brazil, 30% in Mexico and the rest split between Chile, Peru, Colombia etc. Notice how we are currently hitting levels in this spread not seen since 2005:
The point of this ratio analysis is for us to get a structural perspective on where money is flowing. I’m not controlling Billions of Dollars (yet), but those that do move markets in trends like these. It takes time for a cruise ship to turn around; it’s a process. Same thing with Billions, or sometimes Trillions, of Dollars. Seeing these shifts in money flow and huge structural reversals like these are evidence of that shift in money flow. I think these trends are likely here to stay for now and see little reason to believe that emerging markets are where we want to be, particularly on a relative basis.
These are some bigger picture trends that I wanted to point out, but Members of Eagle Bay Solutions receive updates on these charts on a weekly basis, which also includes shorter-term tactical analysis. Make sure you’re registered to receive our Weekly Global Reports.
Tags: $SPY $ILF $EEM $EWZ $EWW $FXI $EWY $EWT $EPI
As you guys know I am constantly reviewing the price action from stock markets all over the Globe. To me, the S&P500 is just one index in one country on this giant planet that we call earth. I get the fact that the rest of the world looks at the United States as a leader and other stock markets tend to follow along in terms what happens in the Dow Jones Industrial Average and S&P500. But for the purposes of managing money, it’s just one asset of an infinite amount of liquid assets around the globe.
Looking at all of the global averages, I can’t think of one that is not in a downtrend vs the S&P500. Today I wanted to share two charts that I think are good examples of why America is the best in the business.
The first one is Emerging Markets as a group compared with the S&P500. The pair trade, if you will, would be long of SPY and short EEM. The iShares Emerging Markets ETF includes China, South Korea, Taiwan, Brazil, South Africa, India, Russia, Mexico and others. Look how nice this giant bottoming pattern has been over the past 8 years. Also notice the breakout above former resistance to start 2014 and now a successful retest:
The next chart compares the S&P500 with Europe. In this case, this pair is long SPY and short FEZ. The Euro Stoxx 50 ETF includes France, Germany, Spain, Italy, Netherlands, Belgium and Finland. Look at this consolidation over the last couple of years well-defined by these two converging trendlines. These symmetrical triangle sort of formations tend to resolve themselves in the direction of the underlying trend. And in this case that is precisely what has occurred. We are currently hitting fresh highs and it appears very clearly to me that the path of least resistance is higher:
These charts tell me that the United States of America is the best place in the world. Execution-wise, I continue to be a ‘buy the weakness’ guy for these pairs. Risk management-wise any failures where these ratios return back below broken resistance, and a more neutral stance would be appropriate. But from where we stand today, the US rules the world and should continue to head higher on a relative basis.
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Tags: $FEZ $EWG $EWP $EWI $EWN $SPY $EEM $EWZ $EWT $FXI $RSX $EPI $PIN $EEM
One of the standout losers to start the week has to be Emerging Markets. We’ve been watching this space closely ever since the failed breakout to new 52-week highs earlier this month. Whenever we see those, the opportunities that develop can provide us with very favorable risk/rewards.
Today we are going to focus on the daily bar chart of $EEM which is the iShares ETF that represents the MSCI Emerging Markets Index. This Index has heavy exposure in China (17%), South Korea (15%) and the rest in places like Taiwan (12%), Brazil (10%), South Africa (7%), India (6%), Russia (5%), Mexico (4%), etc.
Take a look at the failed breakout earlier this month. This is just another one of the million examples of the fast moves that come from failed moves. The problem that I see here is that not only are we entering the week breaking the uptrend line from the 2014 lows, but also key support from the lows in June and August:
Notice the bearish divergence in momentum as RSI failed to confirm any of the new highs in price throughout the summer. Momentum was warning us of a problem, and prices now seem to be confirming. I would say that to invalidate any of this negative action, I would want to see prices rally back above 43.50 without RSI reaching oversold conditions. But other than that, it looks like lower prices are coming.
Moving on to Emerging Markets on a relative basis, we are talking about a group of stocks that have been dramatically underperforming the US Stock Market for basically 4 years. Look at the difference in performance since the end of 2010:
Finally, here is a ratio chart of Emerging Markets relative to the S&P500 (EEM/SPY). Look at prices rallying back to former support last year and failing to ever break through. Now we are breaking uptrend lines and former support from throughout 2014. I don’t see anything to like here on a relative basis:
Trends are trending. Emerging markets can’t get out of their own way. I’ve set some parameters that would change my mind and make me more neutral in this space. But I think any of these positive outcomes are the lower probability scenarios. Nevertheless, it is important to recognize all possibilities.
I will continue to view the EM space negatively and will keep selling strength. There are some individual emerging countries that look better than others. But as a group, this is not somewhere we want to be in from the long side.
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This week we are launching our Global Macro package that includes weekly updates on these charts mentioned above as well as 40 other individual country ETFs on multiple time frames (EWZ, EWG, EPI, EWC, EWA, etc). Email info@eaglebaycapital.com if you are interested in this new package.
Tags: $EEM $RSX $FXI $EWY $EWT $EWZ $SPY $EWW
With Memorial Day Weekend right around the corner, I can’t think of a better time to go over some of these emerging markets. Several of these countries have been making serious noise these days as the developed S&P500 struggles to stay a positive for the year.
One thing I try to emphasize is that not all emerging markets are created equal. Back in February and March, while most of the BRIC nations were breaking down to new lows, India was actually breaking out. That relative strength was pretty impossible to miss. Sure enough, India was tipping its hand and has been the big winner since then. Look at ETFs like the Wisdomtree Earnings Fund $EPI, the Powershares India Portfolio $PIN and the Market Vectors India Small Cap $SCIF on fire the last few months.
Emerging markets as a group, however, are still trying to get out of this long-term consolidation. You can see the symmetrical triangle well-defined by these two converging trendlines. Prices are currently attempting a breakout, but it’s hard to trust until we see the first higher high:
There are some strong positive correlations between emerging markets and copper in both the short and longer-term. Here is a weekly chart showing prices break down in March below key support that went back a few years. We are now back above those levels putting Dr. Copper on false breakdown watch. Long-term readers know that I prefer my false breakdowns to be accompanied by a bullish divergence in momentum, but unfortunately we don’t have that here:
If emerging markets as a group are going to catch a sustainable bid, we want to see Copper take out this downtrend line from 2011. I also really want momentum to get out of this multi-year bear mode. We’re going to need to see RSI break above those highs shaded in gray.
Brazil is an important Emerging Market and the chart is interesting. After a break to new lows earlier this year, prices are now back above that support. This is a similar development to what we’ve seen in Copper. Not a coincidence. The problem is that we’re still below previously broken support levels and a downtrend line from 2011. The good news is we have a nice bullish divergence in momentum. This increases the likelihood of a breakout, but we need to wait and see:
I think the most important thing to keep in mind here is my original point that not all emerging markets are created equal. There are charts like these above, where we have potential failed breakdowns and we’re just waiting for downtrend lines to break. But there are countries out there in the EM space that look completely different.
Look at the potential triple bottom/head & shoulders in Peru $EPU. Look at the new highs being made in Egypt last week after rallying 100% since last summer. We’re now hitting levels in $EGPT not seen since March of 2011. The Philippines are also rocking up close to 20% for the year.
There are some names that are not necessarily correlated to S&Ps and have more exposure to Mining, for example, in the case of Latin America. I think there are opportunities both long and short in this space. But I would keep a close eye on the $EEM chart above and see if they can break them out of this massive consolidation. That would be extremely constructive for the group.
In the meantime, don’t be afraid to look at some of the smaller Emerging Markets. It doesn’t always have to be all about the BRIC nations. There are some less sexy names doing a lot of interesting things right now. I’d be focused on the relative strength between them, just like we saw in India a few months ago.
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Tags: $EWZ $EEM $EPI $PIN $SCIF $SPY $HG_F $JJC
On Friday after the market closed, I was a guest on the Winning on Wall Street Radio show. We talked about Commodities and Emerging markets, specifically the relative strength we’re seeing from India. This show is focused on technical analysis and price, so they understand what we do and why we do it. It’s always a pleasure being on the show.
Click here to listen to the full interview:
Source:
Winning on Wall Street Radio Show
Tags: $KC_F $ZC_F $JO $CORN $SPY $TLT $TNX $PA_F $HG_F $JJC $PALL $EPI $RSX $FXI $EEM $EWZ $SWC
This is one of the more fascinating developments that I’m seeing around the world. With the Emerging Market space getting slaughtered these days, India is surprisingly outperforming its BRIC counterparts by a lot. We’re not talking about a few basis points here folks. This is massive outperformance out of India.
Take a look at this 6-month performance chart of the BRIC nations. China, Brazil and Russia are all down double digits, with Russia continuing its crash and now down over 18% since September (down 50% since 2011 top). But India is magnificently up 13.5% over the past 6-months even outperforming US Stocks during that period:
All of these BRIC charts look like massive tops to me. One looks worse than the next. But India is breaking out to new 10-month highs. This is something that we simply cannot ignore.
Tags: $EWZ $EPI $RSX $EEM $SPY $FXI
