What Emerging Markets Tell Us About the U.S.

by Daniel Putnam | April 17, 2012 12:09 pm

Investors looking to determine the next move for the U.S. market may want to turn their focus abroad. Both stocks and bonds in the emerging markets are flashing a potential warning signal that could have broader implications for the outlook here at home.

Emerging-market equities, as gauged by the iShares MSCI Emerging Markets Index (NYSE:EEM[1]) are sitting just a hair above their 200-day moving average. At Monday’s close of $41.94, EEM needed to fall only 1.8% to dip below its 200-day for the first time since late January. This would be an important development given the high sensitivity of the asset class to both global economic growth and broader liquidity conditions.


eem1 What Emerging Markets Tell Us About the U.S.[2]

A hint as to the likely direction of EEM may be found in the four ETFs tied to the BRIC countries: iShares MSCI Brazil Index Fund (NYSE:EWZ[3]), Market Vectors Russia ETF (NYSE:RSX[4]), iPath MSCI India Total Return Index ETN (NYSE:INP[5]), and iShares Trust FTSE China 25 Index Fund (NYSE:FXI[6]), all of which closed below their 200-day MAs on Monday. RSX and INP have both been in bearish territory for two weeks, while the FXI and EWZ breaks are more recent.

That’s not all. Zooming out to a three-year view reveals that EEM is also in jeopardy of forming a broad head-and-shoulders top that could bring the ETF to $35 from its current level around $42. This could take months to play out, and often charts that look like they’re setting up in a head-and-shoulders don’t behave as they’re supposed to. Still, this is something to watch, not just for a trade but as another indication about the sustainability of the global growth/liquidity story.
eem2 300x114 What Emerging Markets Tell Us About the U.S.
Click to Enlarge

Emerging-market stocks aren’t the only asset class in jeopardy of violating a key technical level. Wisdom Tree Emerging Markets Local Debt Fund (NYSE:ELD[7]) — which reflects the performance of both bonds and currencies in the emerging markets — is also on the verge of slipping below its 200-day MA:


eld What Emerging Markets Tell Us About the U.S.[8]

Alone, these chart patterns may not mean much. However, they are joined by breaks in both copper and Select Sector SPDR-Energy ETF (NYSE:XLE[9]) below their 200-day moving averages, and a continued struggle by Select Sector SPDR-Materials ETF (NYSE:XLB[10]) to stay on the bullish side of its 200:

xlb What Emerging Markets Tell Us About the U.S.[11]

There’s still a chance that the ETFs mentioned here could recover rather than breaking down from here — there are no sure things in technical analysis, after all. Still, these provide some guideposts for investors who are trying to gauge the next move in U.S. equities.

Endnotes:
  1. EEM: http://studio-5.financialcontent.com/investplace/quote?Symbol=EEM
  2. [Image]: http://investorplace.com/wp-content/uploads/2012/04/eem1.gif
  3. EWZ: http://studio-5.financialcontent.com/investplace/quote?Symbol=EWZ
  4. RSX: http://studio-5.financialcontent.com/investplace/quote?Symbol=RSX
  5. INP: http://studio-5.financialcontent.com/investplace/quote?Symbol=INP
  6. FXI: http://studio-5.financialcontent.com/investplace/quote?Symbol=FXI
  7. ELD: http://studio-5.financialcontent.com/investplace/quote?Symbol=ELD
  8. [Image]: http://investorplace.com/wp-content/uploads/2012/04/eld.gif
  9. XLE: http://studio-5.financialcontent.com/investplace/quote?Symbol=XLE
  10. XLB: http://studio-5.financialcontent.com/investplace/quote?Symbol=XLB
  11. [Image]: http://investorplace.com/wp-content/uploads/2012/04/xlb.gif

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