Emerging market exchange traded funds have been underperforming the S&P 500, but looking at the relative performance of the developing markets to the U.S., developing country stocks could be trying to find a bottom.

U.S. stocks have been hitting new all-time highs while emerging markets have been tanking. The MSCI Emerging Markets Index has declined 9.7% year-to-date while the S&P 500 Index gained 18.9%.

J.C. Parets, founder & president of Eagle Bay Capital, on All Star Charts points out that there is a bullish divergence setting up in momentum between the iShares MSCI Emerging Markets ETF (NYSEArca: EEM) and SPDR S&P 500 ETF (NYSEArca: SPY).

Consequently, we could see a trend where the emerging markets would begin leading instead of trailing the S&P 500.

“As prices made fresh lows recently, the relative strength index has already turned up,” Parets said. “Add that to the 200 day moving average sitting 20% away from recent lows, and you have a set up that can’t be ignored. I think we could possibly be at the start of a nice actionable mean reversion.” [Mean Reversion Time for Emerging Market ETFs?]

At the moment, both the iShares MSCI Emerging Markets ETF and the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) are almost touching their short-term 50-day moving averages after gaining 4.3% and 4.1%, respectively, over the past week.

Moreover, investors will also have to watch the U.S. dollar as it will affect the emerging markets. The PowerShares DB US Dollar Index Bullish Fund (NYSEArca: UUP) has strengthened 2.0% over the past month.

Source: All Star Charts

For more information on the developing countries, visit our emerging markets category.

Max Chen contributed to this article.

Full disclosure: Tom Lydon’s clients own EEM and SPY.

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