Emerging Markets Reemerge

 | Apr 09, 2014 | 6:20 AM EDT
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Raise your hand if you can recall the time, not too long ago, when there was a chorus of Wall Streeters chanting that you cannot own emerging-market names. If you have trouble remembering, it was right there, at $37, on the iShares MSCI Emerging Markets Index (EEM) chart below.

I want you to remember that hatred, because at the time I highlighted the head-and-shoulders top on the EEM -- measuring to $37 -- that had developed in the final quarter of 2013. (To calculate, take the difference between the $43 top and the $40 bottom -- $3 -- and subtract that from $40.)

Now, let's listen closely to everyone who seems to have discovered that the emerging markets have outperformed the S&P 500 so far this year. These folks seem to have gotten decidedly bullish, because there were actually some inflows into this group in the past week.

On the updated EEM chart above, that downtrend line would actually give us a measurement of about $46 longer-term. (To calculate this, it's the difference between the $43 high and the $37 low -- $6 -- which we add to the $40 breakout, where it crossed the downtrend line.) Yet, as I noted a week ago, I think it will be quite difficult for the EEM to get through $43 the first time up, as there are two previous highs in place.

Also, please notice the uptrend line, currently at around $42.50, as that ought to act as resistance. I would recommend taking some profits in this area, as it's rather likely there will be digestion period or correction sometime in the next month.

As for the broad market, as I expected, Tuesday's rally was rather tepid. No one seemed to like it very much, and we know this because the put-call ratio stayed elevated all day, finally closing at 91%.

As a reminder, after the big rally on April 1, the equity put-call ratio sank into the 40% area as folks loaded up on more calls than puts. That same day, the put-call ratio for the CBOE Volatility Index (VIX) rose above 100% as folks bet on a lower VIX, or a higher stock market. The market had a mild upward bias on April 2, but since then it has been nothing but downside action.

That's why this elevated put­-call ratio has my eye. While it doesn't show the kind of panic and fear I prefer, it does reveal a degree of caution that had been totally missing from the market a week ago. I don't think the "hatred" for the momentum stocks has achieved the level seen for the emerging markets in late January, I do get the sense that only traders are interested in bottom-fishing there right now. That is probably the best news we've gotten for those stocks in some time.




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