Emerging Markets Approach Support

Posted on March 14, 2013 by Andrew Thrasher — No Comments ↓

While we have been watching the U.S. equity markets tick higher, the emerging markets don’t seem to be fairing as well. Today we are taking a look at the iShares MSCI Emerging Market ETF ($EEM). Since the start of the year $EEM has been hitting lower lows and underperforming U.S. large caps. The same price action can be seen in China ($FXI), which has also been weakening over the last couple of months. The iShares Emerging Market ETF has just over 17% of its allocation in China stocks, giving this Asian market a strong influence in the ETF’s price action.

The below chart shows the trading pattern being created in $EEM with price approaching support, presently at $42.50. It appears the test of support will likely be more of a function of ‘when’ rather than ‘if’ as the U.S. dollar continues to rise, applying pressure to foreign markets due to their negative correlation.

To gain interest in emerging markets traders will likely be looking for some degree of outperformance against U.S. equities. In the bottom panel of the chart we can see the relative performance of $EEM and $SPY, when the line is falling it tells us that $SPY is outperforming (rising more or falling less) than $EEM. The green dotted trend line, which outlines the down trend in relative performance, likely needs to be broken for any meaningful advance to take place in $EEM.

As long as we have a strong dollar and see weakness out of China, it will be very difficult for emerging markets to gain their footing. This is a great example of using outside markets to gain understanding of why a security like $EEM is performing the way it is.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+.

The Battle Between EAFE and Emerging Markets

Posted on January 29, 2013 by Andrew Thrasher — No Comments ↓

As Adam, my firm’s portfolio manager, can attest to – I like pair trades. I like the ability to find pairs that work in a mean-reversion type way that allows a short and long to work together. There appears to be one setting up between the iShares MSCI EAFE ETF ($EFA) and the iShares MSCI Emerging Market ETF ($EEM). The chart we will look at today shows the ratio between these two ETFs along with the Relative Strength Index. When the ratio is rising it tells us that $EFA is outperforming $EEM on a relative basis, with the opposite being true when the green line is falling.

I’ll often look at the momentum of a pair of ETF’s based on the Relative Strength Index (RSI) indicator. While simple overbought/oversold levels give us an interesting picture of the relationship between $EFA and $EEM, I prefer to seek out divergences.

For example, when the RSI indicator breaks above 70 and then creates a negative divergence with the ratio between the two region ETFs. This tells us that since momentum is unable to make a new high that relative performance between $EFA and $EEM may begin to turn. The same can be observed when the RSI breaks below 30 and is unable to make a lower low alongside the ratio.

Looking at the above chart we have the first part of the equation with RSI breaking above 70. Going forward I’ll be keeping an eye on the relationship between the EAFE and emerging markets ETFs to see if momentum starts to diverge.

Emerging Market at Resistance

Posted on September 12, 2012 by Andrew Thrasher — No Comments ↓

Today I want to take a look at the emerging market ETF (EEM). We have seen a rally in EEM alongside most equities, both local and international. Emerging markets have also gotten a boost by some of the positive news out of Europe, which has shown that high tide raises all boats. However, now EEM is up against resistance at $40.60, which it came in contact with back in mid-August. This area was once support for the emerging market ETF back in April before breaking down, as you can see in the chart below.

As we approach the recent short-term high, we must take a look at the ‘health’ of the advance. Turning to our trusty RSI indicator, we see a very slight divergence from price, with the indicator not quite getting to its previous high, although it did get close.

Next up is volume, I’ve put On Balance Volume at the bottom panel of the chart, which simply adds the number of shares traded on positive days and subtracts them on negative days. We can use this indicator to monitor volume flow. I’m seeing a larger negative divergence in volume based on OBV compared to what we are seeing in RSI.

It’s important to recognize the other forces at work here, with the Fed potentially priming the pump for another round of QE, which we’ll find out tomorrow; as well as the increase willingness for more bailouts in Europe. Now these types of events aren’t directly related to the countries that make up EEM, but the ‘risk on’ nature these bailouts and easing induces can make traders throw the negative divergences and resistance out the window and pile into the ETF while trying to increase their allocation to international equities.

I believe much can be found in technical analysis and there may be some downside risk for EEM, but we can’t take our eye of other factors that can have a large impact on the price action of any security, including EEM.