Emerging Markets Turn Technically Bullish
The downtrend in emerging market equities throughout 2018 was strong and unmistakable. As shown on the chart, the iShares MSCI Emerging Markets ETF, or EEM, was on a steady decline for much of last year. But it bottomed in late October. And after forming a higher low in late December, EEM launched into a rebound and partial recovery that has endured thus far this year. It now appears that emerging markets as a whole have turned technically bullish.
Emerging Market ETF Hits New High
On Tuesday, EEM hit a new 6-month intraday high, surpassing the previous high of late February. Currently, the ETF is bumped up against a key resistance level around 43.50. This level has been tested three or four times in the not-too-distant past. A sustained breakout above this level would confirm an extension of the recent bullish reversal.
Helping to support a bullish technical thesis, EEM is also tentatively in the midst of forming a “golden cross.” This is where the 50-day moving average has crossed above the 200-day moving average. Generally considered an uncommon and highly bullish technical pattern, a golden cross has not previously occurred for the ETF since May of 2016.
Chinese Stocks Dominate Emerging Markets
The rise of the EEM ETF is not surprising given that over 30% of its holdings are Chinese large- and mid-cap equities. Korean, Taiwanese, and Indian stocks account for only around 10% each. Just a quick glance at the benchmark Shanghai Composite Index (SSEC) reveals the sharp surge in Chinese stocks since the beginning of the year. SSEC has risen around 24% year to date, far surpassing the S&P 500’s already-impressive 14%. For its part, EEM has surged around 13% year to date, driven in large part by Chinese equities.
What May Happen Next for Emerging Markets?
Of course, the emerging market rally could fizzle at any time. U.S.-China trade concerns and a slowing Chinese (and global) economy may contribute to that. But any strong technical breakout for EEM will increase the chances that the emerging market recovery may extend significantly further.
IMPORTANT: The information above should not be construed as investment advice and should not be considered as a solicitation to buy or sell securities. Trading and investing in the financial markets involves substantial risk of loss, and may not be suitable for all investors.
Disclosure: At the time of this article’s publication, we have no position in any security or trade/investment mentioned, nor do we have any business relationship with any company whose stock may be mentioned.
Chief Market Strategist at The Technicals
With more than two decades of experience as an equity analyst for several major research firms, Don has covered individual stocks (both technically and fundamentally) across a wide variety of sectors and industries, including tech, financial, and retail. He has been quoted regularly in key financial media like Bloomberg and Reuters. Contact Don