Early Signs of Bullishness for Emerging Markets

Emerging markets have just been getting destroyed over the last several months, with the iShares Emerging Markets ETF ($EEM) down nearly 9% year-to-date alone. While everyone appears to be turning bearish on this portion of the market, it seems the underlying internals may be giving us some clues to a shift in trend.

Below is a chart of the ratio between emerging markets ($EEM) and the S&P 500 ($SPY). The green line has been taking the elevator down since October as U.S. equities have been outperforming emerging stocks. However, since November we’ve seen the Relative Strength Index (RSI) begin to rise and create a positive divergence by making higher lows and higher highs.

Over the last couple of days the relative performance of $EEM began to gain some ground against $SPY as it breaks its falling trend line. What emerging market bulls would like to see happen is have the most recent high in the ratio from January get taken out to help confirm the potential trend change. We also have the RSI indicator testing resistance as it attempts to break out and confirm what’s taking place in the ratio.

The trend in emerging markets is firmly negative and just a few days of positive relative gains are unlikely to be enough to see money start barreling back into this depressed market. Although I think the above chart is constructive and is something I’ll be watching going forward – specifically if the ratio can take out its January high. But if we see things shift and the ratio falls back under the trend line and takes out the February low then the above chart will be invalidated and the weakness in emerging markets will likely continue. We’ll see what happens.
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