From the desk of Tom Bruni @BruniCharting
Thank you to everyone who responded to this week’s mystery chart.
Everyone was a seller of this one…and most thought it was an inverted chart, but it wasn’t. Try again next week.
Anyway, let’s take a look.
Here’s the ratio of South Africa relative to Emerging Markets (EZA/EEM) breaking to new all-time lows after resolving a decade-long consolidation to the downside. It’s true, momentum hasn’t gotten oversold (yet), but with our risk so clearly defined and prices moving out of such a large base…we gotta be selling this thing.
Click on chart to enlarge view.
This awful chart builds on our discussion that International Stocks, both Developed and Emerging Markets, continue to underperform US Stocks…especially Emerging Markets.
So we want to be avoiding Emerging Markets, but if you have to be involved in them because of portfolio mandates, then lets at least try to avoid the worst countries in the space…like South Africa.
Another one we want to be avoiding is Thailand. In August the ratio attempted a breakout to new all-time highs, but momentum diverged and sellers pushed prices back into their long-term range. Whether you used the pivot low of 2.17 or high of 2.24 as a risk management level, you’re feeling pretty good today with prices sitting 10% lower. We took our small loss and lived to fight another day.
As they say, “it’s better to be out and wishing you were in than in and wishing you were out.” That certainly applies here and is why we focus so much on risk management and not being “right.”
The Philippines also falls into the “avoid” camp after failing to break through resistance three times this year. Momentum is back in a bearish range and prices are nearing a break of support, so we want nothing to do with this ratio on the long side.
Last on our list is Peru, which has held up well considering the massive downside moves in its peers like Argentina and Chile. While we could see Peru/EEM bounce in the near-term, prices look likely to break this long-term support level and accelerate lower. As a result, we want to avoid Peru as well if we have to be involved in Emerging Markets at all.
The Bottom Line: Emerging Markets are a mess and a half on a relative basis, so unless we’re playing the short side then we don’t want to be involved at all. The money continues to be in US stocks, but if you need to be involved at all then avoid the countries discussed above or potentially consider shorting them against your long exposure in the space.
Thanks for reading and please let us know if you have any questions!