Strength Is Returning to Emerging Markets (EEM)

While U.S. equities markets are lollygagging along in 2015, emerging markets are picking up the pace.

The performance divergence is on clear display today with the iShares MSCI Emerging Markets ETF (NYSEARCA:EEM) climbing 1.24% as of this writing versus the S&P 500’s paltry 0.38% gain.

But it’s not just today’s numbers that tell the story. A longer view of emerging markets reveal a more substantial shift is perhaps afoot.

On an absolute basis, the action in EEM has been improving. Over the past four months the fund has carved out a series of higher pivot lows showing demand is building. With its latest advance — topped off by today’s 1%-plus pop — the emerging markets fund now finds itself at a new four-month high complete with a steadily rising 50-day moving average.

While some work remains, this could be the beginning of a new uptrend.

EEM ETF emerging markets
Click to Enlarge
Source: OptionsAnalytix

The relative performance of emerging markets versus the U.S. best illustrates the budding strength in EEM. As the chart above shows the comparative relative strength indicator recently broke out of a six month downtrend.

Those tiring of the ping pong action in the good ol’ U.S. of A. might consider bullish plays on EEM to capitalize on its newfound strength.

Generate Some Income with EEM Naked Puts

Traders looking to bank some coin off of continued strength in the EEM ETF could sell May put options. The lower price tag of EEM will keep the margin requirement for naked puts at a minimum, which helps to boost the return on investment for the trade.

If EEM pulls back a touch in the coming days, consider selling the May $39.50 put for 50 cents or better. The max reward is limited to the initial 50 cents premium and will be captured if EEM remains above $39.50 by May expiration.

By selling the $39.50 put, you obligate yourself to buy 100 shares of EEM at $39.50 if the put sits in the money at expiration. If you’re a willing buyer of EEM at these prices, you could simply allow assignment at May expiration. Otherwise, buy back the put if EEM falls below $39.50 to limit your risk.

As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.

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