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+.
