Emerging Markets and the USA

This is something that I’ve been watching very closely. And even more so recently as some bullish divergences have begun to appear. The way I see it, US Stocks have been ripping to all-time high territory all year while emerging markets have essentially been crashing. I’m not a believer in the concept of “decoupling”, so I’m in the camp that at some point, something’s got to give. Either US Stocks back off to come down to EM, or EM rallies and catches up to us.

Most of the Emerging world seemed to have peaked on the first trading day of 2013. Since then Brazil lost almost 30%, China 25%, Russia 23%, India, etc. And not just the BRICs either, a lot of the Asia Pacific region had their big sell-offs too, like Philippines for example losing 30% from the May 22nd highs. Meanwhile, most of the major US averages are closing at all-time high territory.

So here is the chart of the MSCI Emerging Markets Fund vs the S&P500 Index Fund. What catches my attention is the bullish divergence setting up in momentum. As prices made fresh lows recently, the relative strength index has already turned up. Add that to the 200 day moving average sitting 20% away from recent lows, and you have a set up that can’t be ignored:

7-17-13 eem vs spy 1

We want to start to see that 24 and change level (shaded gray) get taken out for confirmation of higher highs, but the set up right now is certainly developing. I think we could possibly be at the start of a nice actionable mean reversion. Stay tuned…



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