[Chart Of The Week] Why The U.S. Will Continue To Underperform Emerging Markets

JC Parets
March 16, 2016

One of the best ways to be positioned over the past 2 months has been to be in Emerging Markets, not in U.S. Stocks. I've been pounding the table on this trade since January and it has really worked out in our favor. The big question today is: Now What? Does this thing keep going, or does the longer-term trend of the U.S. outperforming Emerging Markets resume in the second quarter?

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Here is a daily line chart showing the ratio between the S&P500 and MSCI Emerging Markets Index Fund. I think this one is pretty simple. The pair has been working its way lower over the past couple of months, as we hoped for, and now trying to break a bigger level of support. You might call this the neckline of a head and shoulders top:

usa vs eem

If we break this 6.10 level, it suggests that another swift leg lower is coming soon. I would be adding to short positions in this pair if we are below 6.10 with a target down near 5.60. This target is achieved by taking the measured move of 0.50 from the highs in January down to the lows earlier this month.

This 5.60 area was also support back in October. This is where I would be covering short positions.

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Tags: $EEM $SPY

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