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Emerging Markets are taking the Baton

David Becker
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Emerging Markets are taking the Baton

While U.S. stocks are starting to struggle on fears of high valuation, some money is starting to flow into foreign stocks that show better value. Since reaching a bottom in October of 2011 the S&P 500 gained 65% versus a 54% gain in the EAFE Index. The worst performer by far have been Emerging Market iShares which gained only 28%. Given the historic tendencies for global stocks to be more highly correlated, the unusual disparity between global markets is likely to correct itself.

That process may have already started. During the first four and half months of 2014, emerging markets have been the strongest performers and the U.S. the weakest. The EEM has gained 2.7% versus 2% for the EAFA and 1.6% for the SPX. Expectations for more aggressive easing in the Eurozone should provide a tailwind for European equities at the same time that the Fed is winding down its bond-buying program.

The EEM might be forming a bullish continuation pattern in the form of a triangle. The weekly bars in show that Emerging Market iShares have been trending sideways since spring 2011 between two converging trend lines. This seems to be forming a symmetrical triangle. Since the triangle is a “continuation” pattern, and the trend for the EEM was up prior to 2011 that makes this a bullish triangle. The chart also shows the EEM very close to breaking above the upper trend line. That would constitute a bullish breakout for the entire asset class. A close above its October 2013 intra-day high 43.50 would confirm that bullish breakout even further.

On a daily basis, the EEM has broken out and the MACD (moving average convergence divergence) index generated a buy signal. This occurs when the spread (the 12-day moving average minus the 26-day moving average) crosses above the 9-day moving average of the spread.

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