Here is my latest for SFO Magazine:
SFO Daily: Emerging Markets On the Move—Risk On Trade Here To Stay
Friday, January 20, 2012
By J.C. Parets
Emerging markets have been outperforming U.S. equities all year. And, I think this is just the beginning.
Since the fall of 2010, the trade had been long U.S., short Emerging (long $SPY short $EEM). But, this year has been much different.
After this ratio essentially crashed throughout August and September, the last few months have been a base building process with a big shift in momentum. In September, the relative strength index (RSI) had its most oversold reading ever in the $EEM:$SPY daily chart.
While the ratio was making fresh lows around the holidays, the oscillator was already putting in a higher low. This bullish divergence warned us that momentum was now up. The breakout above 0.31 in the ratio confirmed it.
Going forward, the next level of resistance in $EEM:$SPY is about 10% higher. The lows back in May of 2010 and February 2011 were important support. This should serve as some resistance on any retests. We will reevaluate the situation when we get there, but for now 0.34-0.35 is the short term target. There is an important trendline there as well that goes back to the October 2010 all-time highs. A breakout above that critical level could take this ratio back to the 0.40 record level.
Tags: $EEM $SPY $IWM $MDY $CVX $XOM $XLE $XLB