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.
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 firstname.lastname@example.org if you are interested in this new package.
Tags: $EEM $RSX $FXI $EWY $EWT $EWZ $SPY $EWW