From the desk of Tom Bruni @BruniCharting
When owning an ETF, it’s important to understand how it’s constructed. In other words, you need to know what you own.
When it comes to the Emerging Markets ETF $EEM, you’re essentially betting on Asia as ~72% of its holdings are from China, Taiwan, South Korea, and India.
Some might say these are the most important charts in Emerging Markets…so let’s take a look.
First, let’s start with one of Strazza’s neat bubble charts. Here we’re looking at our universe of Emerging Market Country ETFs. On the x-axis, we’re measuring the max drawdown from 52-week highs and on the y-axis, we have its performance since May 28th when the Emerging Markets/S&P 500 ratio (EEM/SPY) bottomed.
As you can see, China, South Korea, and Taiwan are in the top left of the chart…showing that prices experienced the most shallow decline from 52-week highs and have had the highest returns since May 28th. Notice how the closest bubble on the chart is the actual Emerging Markets ETF (EEM), which isn’t a surprise because the strength in these three countries is driving the overall strength in the group’s index.
So while we’re on this topic, let’s take a look at these charts from a structural perspective and highlight some key levels that we need them to be above for the bullish backdrop in Emerging Market stocks to continue.
Here’s the Shanghai Composite, which gapped above resistance and has stalled. As long as prices remain above 3,000, then this breakout is intact but we really want to see prices begin to accelerate highs as they did during the last two structural breakouts in 2006 and 2014.
Hong Kong is the laggard of the group, still trying to get back above support/resistance near 24,700. A decisive move above this area would confirm its failed breakout and at least shift the bias back to the upside. For now, it’s messy at best, but messy isn’t down…at least not yet.
Here’s the Taiwan Stock Exchange Weighted Index breaking out to new all-time highs. This is a 30-year base, so if prices are above 12,000 then the argument could be made that Taiwan’s rally is just getting started and has 50% upside from current levels.
And here’s South Korea which busted right through resistance near 295 after a short pause. It looks like it’s headed back towards all-time highs, at which point we’d expect some consolidation, but our point is trend is sideways to higher.
And here’s India’s Nifty 50 Index. As long as prices are above the confluence of support near 10,000, the trend is sideways to higher.
To conclude, the markets that make up the Emerging Markets ETF are all in either sideways or upward trends from a structural perspective and have been leading the charge higher over the last 4 months. This, combined with US Dollar weakness and Commodity Reflation is supportive of Emerging Markets on an absolute and relative basis.
If you’re bullish on Emerging Markets, you want to keep an eye on these global stock market indexes. Although there are more than a dozen countries represented in the Emerging Market’s Index, these five indexes are the primary drivers of its performance, so we need to be watching them.
Thanks for reading and please let us know if you have any questions.