Why I’d Steer Clear of Emerging Markets… For Now

Phoenix Capital Research's picture

While stocks continue to float on ether and pipedreams, the commodities, credit, and bond markets are all forecasting another round of deflation. Whether it arrives now or in the near future remains to be seen. But he fact remains that at some point we’re going to have another 2008 event. The most likely cause will be Europe, but with the Middle East heating up, and Bernanke’s loose money policies becoming more and more politically toxic in the US, who knows?


On that note, I expect emerging markets to underperform US indexes going forward. One chart I use to view how these two assets perform relative to one another is to price the Emerging Markets ETF (EEM) via the S&P 500. When this chart rallies, Emerging Markets outperform the S&P 500. When this chart falls, the S&P 500 outperforms Emerging Markets.


As you can see, since August, the S&P 500 has outperformed Emerging Markets with the exception of a few brief periods. I expect this trend to continue with US markets holding up better than their Emerging Market counterparts as we’ve recently broken major support.


Indeed, the long-term chart of EEM relative to the S&P 500 shows that the love affair with Emerging Markets may indeed be ending:



As you can see, we’ve broken below MAJOR support here and have since failed to reclaim this line (indicating that former support is now resistance). This is a VERY bearish chart which indicates that we are very likely entering a prolonged period in which Emerging Markets will underperform US indexes dramatically.


Prepare accordingly.


For more market commentary, trading ideas, and investment strategies, visit us at www.gainspainscapital.com

We have a number of FREE Special Reports detailing how to prepare for the coming sovereign debt defaults.


Good Investing!


Graham Summers

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radish juice's picture

Few weeks back were you not singing a different song about breaking down of US equities? Looks like that did not go well!

YesWeKahn's picture

Good stuff, I've noticed that same thing, I would short EEM and buy SPY (or vice versa).

MrSteve's picture

(or vice versa).... or drunk posting. Why would go long EEM when their markets for EEM stuff is ever-more depressed and illiquid? Dr. Spock would call you illogical.

Popo's picture

Technical analysis .... on an ETF ....to measure emerging market potential?

Are you serious?

navy62802's picture

Haha. Emerging markets will be the shock absorber, my friend. When the developed world falls, the developing world slows the descent. Of course, in the aftermath, those who slow the descent of a much heavier animal get crushed. Emerging markets will join the third world once this beast finally dies. Hell, I'm sure much of the developed world will also join the third world.

Eireann go Brach's picture

Back in August you had predicted the world was going to be kidnapped by Mars by Christmas!

covert's picture

they are recipeants of the global welfare state.