Warning Signs for Large Emerging Markets ETF

The iShares MSCI Emerging Markets ETF (NYSEArca: EEM), one of the largest exchange traded funds dedicated to equities in developing economies, is off nearly 6% over just the past month and some traders are betting the benchmark emerging markets fund could see more downside.

Emerging markets equities still trade at a discounts relative to U.S. benchmarks, but the utility of the quality factor in the developing world cannot be understated. Historically, when emerging markets stocks decline, it is lower quality names driving those declines.

Recently, EEM’s technicals have not been giving investors reasons to cheer.

“The fund has been locked in a channel of lower highs and lower lows since March, and this tidy downtrend shows no signs of slowing,” reports Schaeffer’s Investment Research. “Former support at the 200-day moving average has transformed into resistance in recent weeks, and earlier this month, EEM was rejected by its year-to-date breakeven point at $47.12. With EEM now trading well below $46.87 — the area marking a 10% correction from its first-quarter closing high — the emerging markets tracker looks set for more downside as bullish sentiment toward the sector unwinds.”

Issues for Emerging Markets

The recently resurgent U.S. dollar could be one reason why investors are retreating from emerging markets equities. A stronger dollar raises external financing costs for developing economies and usually leads to lower commodities prices, a relevant point because many developing commodities are major commodities exporters.

“With the U.S. Fed on a policy-tightening path, many emerging markets currencies are facing fresh pressures. And with other sectors (like U.S. small-caps) outperforming in a big way, EEM could register heavy outflows as investors rotate into better-performing areas of the market,” according to Schaeffer’s.