The nascent stock recovery is lengthening its stride Tuesday as risk assets across the board are being snatched up with abandon. Leading the charge is the iShares MSCI Emerging Markets Indx (ETF) (EEM), which wafted up 2.5% in early morning trading.
Adding further legitimacy to the dash for risk is the drubbing being suffered by Treasury bonds and gold — two classic safe havens that had heretofore been in serious demand.
You know investors are feeling rosy when treasuries are getting poleaxed.
With Tuesday’s uptick, EEM has now climbed 12.7% off its mid-January lows, outdistancing the rebound in U.S. stocks. For the first time in months the EEM ETF is actually outperforming the S&P 500. Not bad for a beaten-down, left for dead region suffering under the oppressive regime of crashing commodity prices.
Speaking of commodities, the stable price action in the oil markets of late is likely one contributing factor to emerging market’s burgeoning strength.
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On the price action front, EEM’s morning jump is vaulting the popular fund above its 50-day moving average and key short-term resistance.
The breakout arrives on the heels of a pair of higher pivot lows suggesting increased aggression by bargain hunters.
With Tuesday’s resistance breach, EEM has returned to a bona fide uptrend, at least in the short run. Much work remains before the longer-term trends reverse course, but, hey, it’s a start.
EEM Calls Beckon
Implied volatility has descended substantially in recent weeks, making options a fair bit cheaper than they’ve been in a while. I suspect, however, implied volatility will continue its descent if EEM remains bullish.
To capitalize on additional strength out of EEM as well as hedge your exposure to further downside in implied volatility, consider buying a May $31/$33 call spread. The position consists of buying to open the May $31 call while selling to open the May $33 call for a net debit of 90 cents or cheaper.
The max loss is limited to the initial 90 cents and will be forfeited if the EEM ETF sits below $31 at expiration. The max gain is limited to the distance between strikes minus the net debit, or $1.10, and will be captured if EEM can rise above $33 by expiration.
By risking 90 cents to capture $1.10, the spread offers the potential to more than double your money should the emerging markets recovery continue.
