Technical Signs Point to Emerging ETF Rotation

July 18th at 4:30pm by Tom Lydon

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.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.