Nice Rally, But...

 | Jul 23, 2014 | 6:00 AM EDT
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Way back in February, when there was quite a bit of hysteria over the emerging markets, I was a fan of the iShares MSCI Emerging Markets (EEM). The price was around $37-$38. While I have commented from time to time on shorter-term targets, I have not changed my view on them. In fact EEM has a long-term measured target around $48-$50.

I have my doubts on whether it will continue to rally without a pullback, but over time I do expect it to get to the upper $40s.  It was the Chinese market, however, that filled my inbox with questions on Tuesday. I have liked the iShares China Large-Cap (FXI) as well. And, in case you are keeping track, I wrote about Mexico's ETF, iShares MSCI Mexico Capped (EWW), positively as well during the EEM hysteria in February and March. I have had a target on FXI of $39-$40 for quite some time.

The questions that filled my inbox were not related to FXI but rather to the Shanghai Composite (SSEC), since it has not moved the way FXI has. Look at this chart and tell me you don't see a base there. In addition, it has finally crossed that long-term downtrend line. 

There will be problems along the way, beginning with 2080, which is the June high. Just imagine this chart rallying up into the 2125-2150 area and then pulling back over time and rallying again. I have tried to draw it in, so I hope you can see how the base would eventually fill out. I imagine what I have drawn in would take months to play out.

I realize China has more problems than we can possibly count, starting with overbuilding and empty or ghost cities and continuing with poor credit issues. But the chart says perhaps they are all priced in.

Back in our markets, the Russell had a good, but not great day. It continues to toy with that 50-day moving average line we discussed here on Monday. It really needs to put some distance between the current price and the 200-day moving average line, and it hasn't been able to do it.

The S&P also has its battleground right in front of it. That 1985 area continues to act as a brick wall for now. The two indexes performed relatively in line with each other, so there was very little change in the ratio; it ticked down marginally.

I did however notice that the ratio of the iShares 20+ Year Treasury Bond (TLT) to the SPDR Barclays High Yield Bond (JNK) did not tick down. It hasn't spurted higher either, but if bulls are going to enjoy a period of "risk-on," this will need to turn down.

All in all, while there seemed to be a nice rally in the markets on Tuesday, the underlying indicators did not change very much at all. We're still working off that oversold reading.

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