Emerging markets down not out

Emerging markets down, not out

Summary

After a gruelling six months, some emerging market assets are beginning to turn higher.

EM trades try to bounce

With the risk of outright trade war heightened, and U.S. economic strength dragging dollar borrowing costs higher, emerging market assets are losing favour, as depicted by the chart for the WisdomTree EM Consumer Growth ETF below (Figure 1). Compare it with Figure 2 which charts PowerShares QQQ ETF, based on the Nasdaq 100 index. The Nasdaq has outperformed all major U.S. gauges in recent years on the back of fast-growing web giants like Netflix, Facebook and Amazon. Figure 3 is the chart for iShares Value ETF, which tracks the S&P 500 Value Index. None of the three assets qualify as ‘overbought’ or ‘oversold’ according to their stochastic oscillator sub-charts. In each case, the indicator is well within standardised boundaries. However, for the EM ETF, the oscillator only recently re-entered the main chart area, rising back above the lower boundary in recent weeks. In other words, it was ‘oversold’ but is now recovering. In one sense, this suggests a missed opportunity. On the other hand, combined with corroborating factors—for instance if weekly technical support at c. $22.30 should hold—the chart could be signalling a sustainable rebound.

Cautions

It’s important to note that many trending indicators are interval-specific. This means their signals are only applicable within the current time frame. In fact, using daily intervals, all the assets below are either close to or have reached a state of being technically overbought. Additionally, buying, or selling interest can keep an asset overbought or oversold for far longer than anyone can predict. In this case though, one possible takeaway is that the EM ETF has begun a sustainable recovery. This can be confirmed by closer observation.