As I mentioned yesterday in my piece for TraderPlanet, the place to not be in 2013 has been nearly anything international. However there is still some interesting setups taking place in the foreign equity markets. Today I want to look at the relationship between the iShares MSCI EAFE ETF ($EFA) and the iShares MSCE Emerging Market ETF ($EEM). I often use relative performance charts to get a glimpse at where strength is within the interwoven cotton that is our global financial markets.
The chart below clearly shows a relative outperformance of $EFA against its emerging markets counterpart. In September and December of last year we had some resistance form but saw a breakout in late January with EAFE taking the reigns and rarely looking back. In June and July we saw two touches of 1.575 as resistance but it appears we are breaking above that now with EAFE’s continued outperformance.
The 50-day moving average has provided a nice level of support. Going back over the last six years, the ratio has stuck to the 50MA fairly closely – both on the upside and down. It seems when the ratio between $EFA and $EEM had gotten too far from its moving average (like it has here recently) we have seen some type of mean reversion, but the distance from the MA has varied, making the analysis of possible mean reversion much more difficult.
Turning our attention to the Relative Strength Index, we can see solid support has been found at the 50 level over the last few months. This has kept the ratio in a bullish momentum range during the current uptrend. However, as the ratio breaks to a new high we don’t seem to be getting the same reaction in the RSI indicator. While still in a bullish range as I mentioned, it’s not breaking above 70 to show the force of buyers to get an ‘overbought’ reading.
Going forward, as long as 50 continues to act as support for the RSI, we will still have bullish momentum as $EFA outpaces $EEM. If we see some form of weakness and we do in up having mean reversion back to the moving average, I’ll be watching to see if the 50-day continues to hold up as support.
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