What Would It Take for Emerging Markets to Emerge?
Over the years, emerging markets as a group have experienced huge swings in relative performance. The latest one, which began in 2010, has been quite bearish. When such linear trends dominate the scene, reliable cyclical indicators, such as the long-term KST or monthly MACD, often give premature buy signals and are therefore of little use. That said, the KST is currently in a bullish mode, raising the question of whether this signal, the fifth since the secular downtrend began, is the one that finally triggers a long-term upside reversal. The RS line is currently trading at a new secular low and is therefore showing no indication of a reversal, but what of the prospects for the absolute price?
The vertical lines in Chart 2 show that important peaks and troughs in the MSCI Emerging Markets ETF (EEM) closely match turning points in the WisdomTree Emerging Currency Strategy Fund (CEW). The CEW recently broke above its secular downtrend line, which suggests a major turnaround is likely. If so, that would be bullish for the EEM itself. Right now, the price is right at its 24-month moving average and bear market trendline. It's important to remember this is a monthly chart, which requires an end-of-month close for an official plot. Consequently, it remains to be seen where the price will be at the end of December. It's certainly close now, but no cigar at this point.
Drilling down to weekly data, Chart 3 compares the EEM to a 10-week MA of my Emerging Market Diffusion indicator, which monitors a universe of emerging market country ETFs in a positive trend. The vertical lines tell us when it experiences an upside reversal from at or below the oversold -8 level. Since 2008, there have been six such signals. A seventh was triggered in mid-November, which certainly increases the odds of, though does not guarantee, higher prices.
That's important, because the EEM is close to some potential chart breakout points. Chart 4, for instance, shows that all three KSTs are in some form of a rally phase, which should eventually result in the price surpassing $42 on a Friday closing basis. Why $42? Well, that's substantially above the solid green down trendline and right at the dashed horizontal one, marking the top of a potential base. Note that the price has already regained its 65-week EMA, though the importance of that should be downplayed due to the four 2023 false crossovers. In situations where it is obvious a trading range is developing, it is usually better to rely on a breakout from the range itself, which in this case would be a rupture of either of the dashed trendlines.
The $42 level is also the breakout point on a daily basis, as we can see from Chart 5. Moreover, the Special K in the lower window is in the process of forming a base. A joint break above the two solid green trendlines would be bullish for the fund in a similar but opposite way to the 2021 bearish combination. In the vast majority of situations, such joint price/momentum breakouts work very well. However, the failed bullish signal in 2020 reminds us that this is not a perfect technique. A joint penetration of the two red lines would have confirmed the failure. Should the EEM complete its 2022-23 base as expected, I would use a violation of the two 2023 red trendlines as an indication of failure.
Not All Emerging Markets are Created Equal
We tend to think of emerging markets as homogeneous, but there is a dichotomy between their economic structures and stock market performance. Chinese shares were included in the EEM portfolio in 2017. Since then, their weighting in the EEM has gradually been increased, now standing at 34% according to Microsoft's copilot. As a result, the EEM price action has tended to mimic that of the Deutsche Trackers 300 China A Share ETF (ASHR). Chart 6 compares the two. Since China has recently underperformed the world by a wide margin, it has has acted as a drag on EEM price performance.
One area which has not is Latin America, or rather the iShares Latin America 40 ETF (ILF). Chart 7 shows that both the price and the RS line against the Dow Jones World Index have broken above their secular resistance trendlines. Since the two KSTs are in a positive trend, the recent break is likely to be valid.
The moral of the story is that, if the EEM is going to violate its secular relative down trendline in Chart 1, Latin America is likely to be the place where it starts!
Good luck and good charting,
Martin J. Pring
The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Groupof Walnut Creek or its affiliates.
