At the beginning of this year it was widely believed that emerging and European markets would do well, and maybe even outperform the U.S. That has clearly not happened. Oh, maybe it's all the trade war talk, or maybe it's the strong dollar. Or maybe it's interest rates. Maybe it's a combination of all the above, but one thing we do know: the positive chatter is gone.
Now we hear how Europe is caught between a rock and a hard place, as it sits in the middle of the U.S. and Chinese trade spat (I am told we cannot call it a war until...well until, I'm not sure!). We are told emerging markets don't fare well in a rising rate environment. Wait, didn't we know rates were rising at the beginning of this year? In any event, there are plenty of excuses now.
If we look at the one-year chart of iShares MSCI Emerging Markets (EEM) , an ETF to be long the emerging markets, we see June was the last straw, as EEM broke down from a big top. There are several ways I would have drawn that line (i.e., it could have been flatter, making the break at $45 instead of the uptrend line I drew), but I think you will agree, EEM does not look good here. That top measures into the $38-40 area. So, the good news, is that EEM's a lot closer to the downside target than it was a month ago.
When we move to a longer-term chart of EEM, below, it doesn't look like a big top, but more like an extended correction. What is interesting, though, is that a retest of the breakout comes in at $38, which to me reaffirms that $38-40 target area.
This is more of an intermediate-term-to longer-term look with those targets. In the shorter term I am paying close attention to the fact that EEM is attempting to make a stand relative to the S&P 500. It's too soon to say if this is temporary or not but nothing goes in a straight line, so I would not rule out a rally back to resistance near $45.
If we use Vanguard FTSE Europe (VGK) , an ETF to be long Europe, we see that despite the decline from January, it has not really broken down. It threatens but it hasn't done so yet.
On the weekly chart of VGK, below, that black line is support. What's interesting is the red line is the next real support and there is a gap there. And it's where the top, if broken would measure to.
Relative to the S&P, VGK has been doing better for two weeks now. I'm keeping a close eye on VGK now since I can't recall the last time I heard anyone say anything nice about European stocks. Can you?