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Message of the Markets: Don't Buy Much of Anything Yet


Until the emerging markets bottom and we see some stability in currencies, there's too much risk now to make any major buys.

We're still in a bear market mode -- rallies are to be sold and not chased. Only very oversold conditions can be bought -- for a trade only. This is a very treacherous market condition where holding cash that's returning nothing is more desirable (for the time being) than assuming any unnecessary risk. That will change at some point -- but not yet.

Message of the Markets

Emerging markets are providing leadership -- on the downside.

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  • You know by now that I believe emerging markets to be a critical tell for the global markets. After all, that's supposedly where the growth is now, right?
  • The chart above shows the spread ratio of the iShares Emerging Markets ETF (EEM) versus the S&P 500 ETF (SPY). Here are some observations:
    • The ratio is clearly in a downtrend right now (red line).
    • The ratio broke below horizontal line support and the 100% Fibonacci projection line (yellow boxes) and is now testing that new resistance level.
    • There is plenty of room to the downside before the 2008-09 crisis levels are tested.
    • Notice that the ratio bottomed in 2008 and started making higher lows almost on a monthly basis from that point on.
    • We need to see a pattern of higher lows start to develop now before we can get more optimistic on the prospects for global equities.

The EEM chart broke below the 400-day moving average and is now testing its uptrend line:

Click to enlarge

  • Notice in the chart of EEM above that the 400-day moving average has been a pretty good tell for the prospects of the fund. Green boxes show where the average held up as support and the yellow boxes show the breakdowns/re-tests. EEM has convincingly broken down below the 400-day average -- not good!
  • The EEM is trading above the long-term uptrend line -- barely, and for now. If that level of support breaks, then we could see another 10% - 15% of downside in a hurry.
  • The chart of EEM below shows how the uptrend was actually broken on a daily basis, but EEM recaptured that uptrend line the very next day. A weekly/monthly close below $35.61 will be real bad news for global risk bulls.

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No positions in stocks mentioned.

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