Dave, What is your take on emerging markets?

 

Afternoon Dave,

Technically it looks like EEM (Emerging Markets ETF) might finally be ready to pop higher. What are your thoughts?

Stephanie R – Amagansett, NY

Stephanie,

Ahhh, yes, seeking to low in EEM….man that has been tough thus far in 2018! 

The talking points surrounding it are very compelling:

  • EM valuations are very attractive
  • Technically, this is just a correction off the January highs
    • In fact, price action lower has been choppy and found support at a 50% Fib level
  • The Dollar Index (DXY) will continue the overall downtrend

The last bullet point is certainly the one that remains unclear. While I would agree that the rally in the DXY is merely a correction, as of now, it has not displayed any signs that it wants to turn lower.

Naturally, the rally in DXC coincided precisely with the move lower in EEM (the two are inversely correlated).

Valuations and technical levels aside, unless DXY turns lower, EEM will not gain any traction to the upside. This, of course, is speaking from a trading perspective. From a longer-term investment perspective, we increased our allocation to Emerging Markets in the Aspen Model Portfolio a couple of weeks back expecting that the underperformance is overdone.

I would be inclined to be a trader of EEM or VO when DXY breaks lower. I will be watching for a break/daily close below 94. That would suggest prices have started a more meaningful decline that will be persistent.

Hope that helps,

Dave

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