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What Does the Death Cross Mean for Emerging Markets?


As the name suggests, the Death Cross may have bearish consequences.

Emerging markets are in the news today because the iShares MSCI Emerging Market ETF (NYSEARCA:EEM) is forming a bearish Death Cross. This occurs when its 50-day moving average crosses beneath the longer-term 200-day moving average. As the name would suggest, this should have bearish consequences.

Two of my favorite technicians both weighed in on the EEM here and if these guys talk, it pays to listen. I'll talk some about the Death Cross after we look at what they had to say.

First up, Greg Harmon noted the ratio chart of the SPY (NYSEARCA:SPY) to the EEM is up near potential resistance. In other words, the EEM could finally start to outperform the SPY after lagging for months.

Next up, J.C. Parets looked at several charts of the EEM and determined on a relative basis (like Greg mentioned) it could be appealing, but on an absolute basis, he just didn't have a strong opinion. There's nothing wrong with not having a strong opinion. Remember, you want to swing at the pitch down the middle of the plate, and according to J.C., it isn't there yet.

Here's the chart he made regarding the ratio chart of the EEM to SPY. Again, EEM could start to outperform SPY here.

What about the Death Cross, you ask? Well, it sure looks bearish to me.

The ETF started trading in mid-2003, so starting in 2004, there have been seven previous times we've seen a Death Cross. The near-term results two weeks later are very bearish, down 4.08% on average and higher just once out of seven times. Going out further, though, things don't get a lot better. One month, three months, and six months later sport negative returns across the board. Yes, this is a very simple way to look at things, but this could definitely be a headwind for the EEM here.

Lastly, we've done studies on Death Crosses before and usually they are actually bullish. The reason being that once it happens, you've probably had a lot of poor performance and it is time for a bounce. Check out the S&P 500 (INDEXSP:.INX), as it actually does better after a Death Cross than the anytime average returns. Now the SPX isn't close to a Death Cross; I just wanted to point this out.

This article by Ryan Detrick, CMT, was originally published on Schaeffer's Investment Research.

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