One of my favorite charts over the past few years has been this monster breakout in U.S. Stocks vs Emerging Markets. Obviously we have seen a pretty huge sell-off in the emerging space recently because of all their exposure to energy and materials, but this underperformance compared to U.S. equities is nothing new at all. Coming into 2014, I was pointing to the major breakdown in emerging stocks relative to the U.S. and over the past 20 months or so, this trend has continued and the crash is hitting fresh lows this week (new highs in U.S.).
Here is a weekly line chart showing the fresh breakout in early 2014 coming out of the monster base that had been building for 7-8 years. We continue to grind higher as money flows out of Emerging Markets and into U.S. Equities:
I still think there is more room to run and we can potentially get up near a ratio of 6.7 which represents those June 2004 highs. This is another 17% of upside in this ratio after the 30% rally that we’ve already seen since the initial breakout 20 months ago.
Tactically is this where we want to be putting on new positions in this ratio? I would say no. We are currently running into the upper end of a very clean uptrend channel that goes back several years. In fact, I would be fading this ratio up here as we hit these levels and look to be putting new money to work at lower prices giving the larger-term timeframe the benefit of the doubt. Here is a daily line chart showing this ratio:
Taking the weight-of-the-evidence, and more specifically looking at the behavior of the components of the MSCI Emerging Markets Index, there is a lot more bad than good, especially longer-term. I would keep the larger timeframe in mind when making bigger decisions because this continues to be one of the strongest trends on earth. We just hit fresh 10-year highs this week.
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Tags: $SPY $EEM