Jeff Saut: Consider Investing in Emerging Markets or Silver if Markets Continue Higher

By Jeff Saut  MAY 13, 2014 11:49 AM

If the bull market continues, high-relative-strength names and out-of-favor assets may benefit.

 


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To me it is like a giant treasure hunt. Somewhere in here [he pats the weekly chart book] there is going to be a big winner, and I am trying to find it.

-- David Ryan, from Market Wizards by Jack Schwager

Now, that's more like it! In last Friday's post [subscription required], I wrote the following:

The S&P 500 (INDEXSP:.INX) and the Dow Jones Industrials (INDEXDJX:.DJI) appear to be waiting for little brother Russell 2000 (INDEXRUSSELL:RUT) to join the party, and it will be difficult for the S&P and the Dow to burst through their recent highs without the boost to market sentiment that would come from the small caps catching bids.

Well, it didn't take long for the fashionably late Russell 2000 to finally get the invitation and put on its party hat. The small-cap index has now appreciated over 3.75% since the Friday low and closed yesterday back above the always-important 200-day moving average. Perhaps even more notably, the market has also switched back to a more "risk-on" market sentiment, with the small caps and tech-heavy Nasdaq Composite (INDEXNASDAQ:.IXIC) outperforming the S&P 500 and the Dow Jones Industrials over the past couple of sessions. Only time will tell, of course, whether or not this relationship will hold, but with the S&P 500 and the Dow back to new all-time highs and with the erstwhile laggards finally finding some support, this market suddenly feels a whole lot healthier and should be viewed as such until an alternative signal is given.

So, starting from the premise that this is a bull market that has just undergone a pullback and internal correction, the next step in the analysis process becomes much more fun -- trying to uncover those investments that will outperform over the coming weeks and months. There are countless ways to approach this giant treasure hunt mentioned in the above quote, with some preferring to focus on the high-relative-strength names that have held up the best during the recent market ambivalence, while others go digging among the out-of-favor assets that have underperformed, looking for a diamond in the rough. The key is to find a method that's consistent with your investment philosophy. When it comes down to it, some investors like buying on strength while others like buying on weakness.

For those in the buy-on-strength camp, the iShares Emerging Markets Index ETF (NYSEARCA:EEM) caught my eye last night while flipping through charts. With all of the emerging market negativity during the beginning of the year, many investors may be surprised to learn that EEM held up very well during the recent consolidation in the US indexes. It now appears to be breaking out from a multiyear symmetrical triangle pattern. A weekly close above the top line in the chart below should be enough to confirm the breakout.

http://image.minyanville.com/assets/buzzbanter/charts/original/051314/sautTACK_1399987079.png
Click to enlarge

If you fall into the latter category that likes to buy on weakness, you may want to consider passing on the diamonds and looking to silver instead. The iShares Silver Trust (NYSEARCA:SLV) currently sits at support and provides a very good risk-to-reward trade here. Only a weekly close below $18 would negate the signal.

With assistance from Raymond James analyst Andrew Adams.
No positions in stocks mentioned.

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