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Emerging Markets: With Strength Indicator Still Falling, Consider Going Short


Charts show no evidence to support abandoning equities; however, attractive short opportunities look to be most appealing.

Emerging market equities have been out of favor going on three years, and technical conditions suggest the 2014 emerging markets outlook probably isn't much better. In fact, I will probably be looking for attractive short opportunities this year.

Usually I begin my posts by looking at the price action. In this case, though, I'd like to highlight the performance of the iShares MSCI Emerging Market ETF (NYSEARCA:EEM) relative to the SPDR S&P 500 (NYSEARCA:SPY); I believe it illustrates how you wouldn't want to be in emerging market stocks even if the price chart didn't look so lousy. There are better opportunities elsewhere, and the US still looks good. This is why my 2014 emerging markets outlook isn't too rosy. Follow along with the chart below.

Click to enlarge

The two lines at the bottom of the chart are fast and slow averages of a relative strength line dividing EEM by SPY. Most of you are probably familiar with relative strength lines as a tool for determining how different assets are performing relative to each other. I employ moving averages on the RS line in order to reduce false signals and get a clearer picture of the trend.

As you can see, the indicator has been falling steadily since late 2010. The US was the place to be, and still is. Both RS averages are at lower lows and don't show any sign of a bottoming pattern.

Now bring your eyes up to the price structure in the upper half of the chart. I've highlighted a supply zone at approximately 45 to 50, based on the topping activity in 2010 and 2011, which goes right through where a top was established in 2007 and 2008. The asterisks show that three rally attempts in the past two years were thwarted at or near the bottom of the supply zone.

If the sideways trend since late 2011 resolves down, this space would likely be in for quite a bit of pain. From a long-term perspective, supply and demand have been in balance; a break lower would warn of the possibility of a tailspin until the next equilibrium was found at a lower level. All told, I don't see any evidence to suggest it's time to abandon equities. However, you may want to limit your exposure to emerging markets during 2014.

This article by Chris Burba originally appeared on See It Market.
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