Time to Take Profits in Emerging Markets?

With part two of the monster rally nearly upon us (part one was from March to May 2009), we are on the alert for some potential important changes in relative performance trends (against the S&P 500), especially with merging markets, which have produced stellar returns since the November 2008 lows with:

• India (INP) 87%
• China (FXI) 76%
• Russia (RSX) 76%
• Brazil (EWZ) 85%
• Emerging Markets (EEM) 71%
• Developed Markets (EFA) 25%
• Global 100 (IOO) 14%

We feel that the emerging markets en-masse will be hard pressed to repeat these gains over the next three to six months. Russia was one of the first emerging markets to turn sour in 2008, and once again is showing similar signs of weakness (please refer to chart RSX:SPY and chart RSX:EEM) brought on primarily by the fall in the price of oil.

Investors should be aware and keep a watchful eye on the first chart of the MSCI Emerging Markets ETF to the S&P 500 ETF (EEM:SPY). We believe that given the over optimism in sentiment, this uptrend of relative performance will break down in the coming months, with higher performance coming from the developed markets, especially the U.S. However, we concede that “it's not about being right, but about making money” and the market will tell us if this stance is wrong.

What then? We will go with the flow and buy the EEM on a last hurrah relative chart breakout.

Stay tuned there is movement afoot.

click to enlarge images

Disclosure: No positions, but some featured in our model portfolio

Comments

[Steven Hansen:]

i agree with your sentiment however we also need to consider currency dynamics also.

given a choice between the american markets and a possible declining dollar, and a flat foreign market with a possible increasing local currency - the emerging markets may be a better buy.

however, it may be true it is time to withdraw from all the markets as the crap may be hitting the fan again.

Jul 12 04:53 AM

[Mad Hedge F...:]

It's kind of late to sell these, but there may be more pain to come. Given the profusion of negative indicators, and moving averages rolling over like the Bismarck, I would be remiss in my public duties if I did not tell you to sell everything. Dump the reflation trade. The “green shoots” are dead. Liquidate emerging markets (EEM), commodities (DBA), the metals (GLD), foreign currencies (XEU), and cover your shorts on safe haven pays, like Treasuries (TBT) and the yen (XJY). Real estate in all forms will continue to die its own private death. Batten down the hatches. Reduce your risk. If you can’t sell, then hedge your positions. If you can’t hedge, then sell calls against your positions. If you can’t sell calls, then find another line of work, because there are so many inverse ETF’s around these days, you no longer have an excuse to take a big downside hit. This is where your stops earn their pay. I begged you, pleaded with you, and beseeched you to dump your position on May 1 (see “Sell and May and Go Away” and June 16 see “The Worm has Finally Turned” , and now I am trying again. Please also revisit the short plays I offered earlier on the S&P 500 (SDS) and the Euro (DRR) . And don’t ever call me indecisive, waffling, or equivocating.

Jul 12 12:32 PM

[Alan Young:]

Interesting and timely observation. Thanks.

Jul 12 03:18 PM

[prairiedog555:]

Would you also stay away from EM or Soverign debt?

Jul 13 09:06 AM

[Beacon Asse...:]

We prefer EM sovereign debt at this stage rather than equities, with the exclusion of Russia debt.


On Jul 13 09:06 AM prairiedog555 wrote:

> Would you also stay away from EM or Soverign debt?

Jul 14 04:37 PM

[beppe:]

What about Csco ?

Sep 18 08:21 AM

[beppe:]

And (GOOG) ?

Sep 18 08:21 AM