EMERGING MARKETS ARE IN DOWNSIDE CORRECTION LED BY INDIA AND CHINA -- BOTH MARKETS, HOWEVER, ARE BOUNCING FROM OVERSOLD CONDITIONS -- BRAZIL AND SOUTH AFRICA ETFS ARE BOUNCING FROM CHART SUPPORT
EMERGING MARKETS ARE 2011 LAGGARDS... I'm not a believer in global decoupling. On the contrary, I believe that global stock markets are highly correlated and usually trend in the same direction. That's especially true of the relationship between emerging and developed markets. Chart 1 shows a strong correlation between emerging markets (black line) and the Dow Jones World Index of developed markets (blue line). The main point is that these global markets usually rise and fall together. The chart also shows that emerging markets have risen a lot faster than developed markets since the 2009 bottom. In fact, emerging markets gained 130% from that bottom versus 90% for developed markets. Growth in the larger emerging markets like China and India is often cited as the engine driving global economic growth and uptrends in stocks and commodities. Problem is stock markets in those countries have been falling since last November.
Chart 1
CHINA AND INDIA WEAKEN... Since last November, developed markets (blue line) have gained 10% on average. During those same three months, the India stock market (black line) has fallen 18% while Chinese stocks (red line) have lost nearly 8%. Global inflationary pressures in those countries are forcing interest rates higher which is hurting their stocks. Since global stocks and economies are closely linked, any serious problems in those countries could have an impact here and in other developed markets. So it's important to monitor their trends for signs of improvement (which is good) or signs of further deterioration (which could be bad). Let's take a look at their individual charts and those of Brazil and South Africa which have also lost ground in 2011.
Chart 2
CHINA AND INDIA REBOUND FROM OVERSOLD CONDITIONS ... Charts 3 and 4 show the severe downside corrections that have taken place in Chinese and Indian stock ETFS. The good news is that both markets are very oversold and attempting to rally. Chart 3 shows China iShares (FXI) climbing back over its 200-day moving average. Daily RSI and MACD lines are showing positive divergence from an oversold condition. Those are hopeful signs. India is in a deeper correction. Chart 4, however, shows the iPath India ETN (INP) also rebounding from a deeply oversold condition. Obviously, India stocks are in a far weaker condition than those in China. Other emerging markets, however, have held up much better than those two giants.
(click to view a live version of this chart)
Chart 3
(click to view a live version of this chart)
Chart 4
BRAZIL AND SOUTH AFRICA BOUNCE OFF CHART SUPPORT... The charts of Brazil and South Africa are more encouraging. Chart 5 shows Brazil iShares (EWZ) bouncing sharply off its 200-day average and chart support along its fourth quarter low. Chart 6 shows South Africa iShares (EZA) bouncing off chart support along its fourth quarter lows as well. [South Africa is closely tied to trends in gold and platinum which have turned up recently]. Both of those charts suggest that the downtrend in emerging markets in general may be stabilizing.
(click to view a live version of this chart)
Chart 5
(click to view a live version of this chart)
Chart 6
EMERGING MARKET ISHARES STILL IN TRADING RANGE... The good news is that no serious chart damage has yet been done to the main index that measures that asset class which is MSCI Emerging Markets iShares (EEM). Chart 7 shows the EEM having lost nearly 8% from its recent highs but still trading above its November trough and its 200-day moving average. So far, that qualifies more as a consolidation than a top. Part of the reason the EEM has held up relatively well has to do with its country weighting. After China, which has the biggest EEM weighting of 17%, comes Brazil (16%), South Korea (15%), Taiwan (12%), Russia (7%) and South Africa (7%). Except for China, losses in those other emerging markets have been relatively minor and closely match the losses shown in the EEM (except for Russia which is up 3% in 2011). India, which has seen the biggest losses, has a relatively small EEM weighting of only 5%. The recent correction in emerging markets is of some concern because it has created a short-term negative divergence from more developed markets. Over the short run, the drop in emerging markets has actually benefited developed markets by driving funds into Europe and North America which appear more stable at the moment. That positive attitude will remain in effect only as long as the pullback in emerging markets remains relatively contained. From a charting standpoint, that means that the EEM needs to stay above its late November low and its 200-day average. So far, so good. But it bears close watching. A pullback in emerging markets may be good for developed markets. A serious downturn in emerging markets wouldn't be.
(click to view a live version of this chart)
Chart 7
GDX CLEARS 50-DAY LINE ALONG WITH ABX AND AU ... My Tuesday message showed the Market Vectors Gold Miners ETF (GDX) moving up to test its 50-day average. Chart 8 shows the GDX trading above that resistance line today on the back of rising precious metal prices. Chart 9 shows Barrick Gold (the biggest GDX holding) doing the same. Chart 10 shows one of the top holdings in the South African ETF -- Anglogold -- breaking its 50-day line as well. Gold is gaining again today after exceeding its 50-day line on Tuesday. Silver has broken out to a new 30-year high and is pulling silver shares higher. Two successive inflation reports have higher than expected headline numbers and show even core inflation starting to build. It now appears that the only people in the world not worried about inflation are members of the Fed.
(click to view a live version of this chart)
Chart 8
(click to view a live version of this chart)
Chart 9
