Why Emerging Markets Are A Hot Mess

There are good places in the world and there are some really bad places. But to me, the worst is when they are somewhere right in the middle where both the bulls and the bears lose. That's no fun. I think the best example of this scenario is currently in Emerging Markets, particularly from a structural perspective. We can look at individual countries like Taiwan, Russia, China, etc.. but for the purposes of this discussion, we are going to focus on the MSCI Emerging Markets Index.

From a bigger picture perspective, Emerging Markets could not be more perfectly priced. One of the things I constantly try and stay away from are markets with flat 200 period moving averages. This is the pure definition of a lack of trend. Here is the $EEM exchange traded fund using weekly bars and the 200-week simple moving average in red:

Look how prices are exactly in the middle between these two converging trend lines since 2007 and right at the 200-week. I see absolutely zero reason to be long or short from a structural perspective. No advantage here whatsoever in my opinion. The resolution out of this giant pattern should lead to a great risk/reward opportunity at some point in the future. But why not just wait? Short-term there may or may not be a trade. I think the opportunities tactically are in the individual countries, both long and short. We discuss this in depth in our Global Macro Report for members.

But big picture, I see no reason to be involved. I think the best way to play this is still to be shorting Emerging Markets, but on a relative basis. There isn't anywhere better than the United States; nothing is even close in fact. So with Emerging Markets as a serial underperfomer, this pair still makes the most sense. What's there not to like about this chart?

As long as prices are above the lows from this year, which were the highs since 2006, I think we can stay long and strong this chart where we are long $1 worth of SPY for every $1 we are short EEM. The bigger the base the higher in space, as they say. This spread closed at 9 year highs last week.

Emerging markets are still a hot mess.

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Tags: $EEM $SPY