[Chart Of The Week] Why Emerging Markets Will Outperform U.S. Stocks

JC Parets
January 29, 2016

One of the big themes that I see globally right now is the inordinate amount of bullish momentum divergences across the board. You can see these even more pronounced in the emerging market countries, although to be fair, they can be found in the developed nations as well. They are all detailed in the Chartbook. I think that a very telling chart right now is the S&P500 vs the MSCI Emerging Markets Index.

Here we are looking at a very well-defined multi-year uptrend channel in the S&P500 vs MSCI Emerging Markets Index

going back to 2011.

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We are currently running into the upper end of this channel, which is where the ratio has corrected in the past:

spy vs eem

Notice how momentum is putting in a bearish divergence at the recent highs. With the ratio making a new 11-year high this month, momentum put in a lower high. This is what we call a bearish divergence. I think there is a very good chance that we get back under 5.75 in this ratio.

There are two ways to take advantage of this. One - keep it simple stupid and just play the spread. For every $1 short the S&P500 $SPY, we are long $1 of the MSCI Emerging Markets Index $EEM. Risk management-wise, we only want to be short this spread if we are below the upper of the two parallel trendlines that define this channel.

The second way is much more global and "theme-based". I think there is a lot going on right now as money flows back into emerging markets and commodities that effect them like Crude Oil and Copper. I think this chart is a quick way to see what I consider to be a much bigger story.

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Tags: $EEM $SPY $CL_F $USO $JJC $HG_F

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