Getting Technical
Emerging Markets Rally: Room to Run, Charts Say
Recovering oil and gold are boosting emerging market stocks, but they are not out of the woods yet.
By Michael Kahn
Measuring from its April 2011 high, the emerging markets ETF has fallen 34% through this month compared with a 46% gain for the S&P 500. But year to date, emerging markets are up 2% compared with a 2% loss for the S&P 500. It’s not much in numbers, but on the charts the change is a bit more significant.
In August of last year, when global markets were in the midst of a sharp sell-off, the ETF broke through the bottom of a four-year trading range (see Chart 1). The ETF rallied back to test the former range in October but started a new leg down shortly thereafter; finally finding a footing in January of this year at a technical price objective.
Chart 1
IShares MSCI Emerging Markets ETFSince hitting its downside target, the ETF has moved above a short-term declining trendline and its 50-day moving average. Momentum indicators are strong and cumulative volume is heading modestly higher. In other words, it is a real rally. Still, questions remain about its sustainability.
On the plus side, domestic sectors related to the consensus view of what emerging markets represent support the current rally. Earth moving machinery stocks such as Caterpillar are strong. Gold broke a trendline to the upside while gold stocks have been on a tear higher. And basic materials stocks such as paper and steel are also moving sharply higher. U.S. Steel, for example, has gained about 13% over the past four trading days alone.
On the negative side, however, the ETF’s holdings are quite heavily skewed toward financials and technology. Domestically, these two sectors are currently lagging the broad market.
And the ETF is still below its key 200-day moving average. Until it crosses the average we do not know if it is the start of a bull market, so we have to presume a resistance feature will hold. And while it is beating U.S. stocks, as mentioned, it is only by a small amount. If a beleaguered sector were truly ready for a sustained advance I would expect a much stronger relative performance vs. the S&P.
A look at some individual country ETFs shows those more dependent on energy prices, such as the Market Vectors Russia ETF, and precious metals, such as the iShares MSCI South Africa ETF, are in much stronger rallies. Those more dependent on manufacturing, such as the iShares MSCI South Korea Capped ETF, are not quite as strong.
Basically, we cannot lump all emerging markets together. So while the emerging markets ETF looks as if it can tack on another 10-11% as it heads towards very strong resistance at the bottom of its old trading range, its reliance on energy and precious metals should give pause.
After all, while I do think energy prices have bottomed, that market does need a good period of basing to heal all the technical damage suffered since 2014. And gold still has a ton of overhead supply from the past three years below $1,400 per ounce to battle (it closed at $1,268 Monday).
Emerging markets have short-term positives, but will run into longer-term negatives within weeks. That means bulls can play, but must stay alert for changes.
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