In part 1 of our commentary, we discussed the current Fundamental Gravity of our “Reflation&rs...
Two Breakout Emerging Markets
07/01/2011 10:19 am EST
The ETFs that track fast-growing Indonesia and Malaysia look poised to outperform, and with a pullback likely in the week ahead, favorable buy set-ups may be presented for both.
Most of the emerging markets have rallied alongside developed markets this week and have bounced sharply from their lows. Still, it is a very split picture, as the outlook for the emerging markets as a group looks less attractive than that of the US market.
Clearly, the move out of higher-risk assets that began with silver’s plunge in early May has hurt many of the emerging market ETFs. Many of those funds had already peaked in April and were declining.
While the BRIC markets are still well below the prior highs, there are two country ETFs that are breaking out to the upside and in my view have the best potential for the rest of the year. I do expect a slight pullback in these ETFs over the next week, which should be a buying opportunity.
Chart Analysis: The iShares MSCI Emerging Markets Index Fund (EEM) hit the 50% support level with the June 23 low of $45.59. This ETF has its highest concentration in the Brazilian oil company Petrobras (PBR), which may explain why it is lagging.
- There is additional support from the May 2010 highs at $44
- The relative performance, or RS analysis, versus the MSCI World Average does show higher lows (line b), which is positive, but despite its 4% bounce this week, it is still below the downtrend, line a
- The daily on-balance volume (OBV) is back above its weighted moving average (WMA) but the weekly volume (not shown) still looks weak, as it is below its declining WMA
- The 50% retracement resistance has been reached with more important resistance now at $48.60
The weekly chart of the Market Vectors Indonesia Index (IDX) looks very strong, as it is just below the weekly trend line resistance at $32.33 (line e). The upper parallel trend line (line d) is now in the $36.50-$37 area.
- The weekly chart formation has additional targets in the $40 area
- The OBV is back above its weighted moving average and is very close to moving above resistance at line g. The OBV does show a long-term uptrend, line h
- Initial weekly support is at last week’s high of $31.30 and then in the $30 area
NEXT: Good Buy Set-up for Malaysian ETF|pagebreak|
The daily chart of the Market Vectors Indonesia Index (IDX) shows the completion of a continuation pattern, lines a and b. The formation has upside targets in the $33.50-$34 area.
- The RS versus the MSCI World Average broke its downtrend in February and now shows a solid uptrend, line c. It just made new highs
- IDX is already above its May 2 closing highs, while the S&P 500 is 40 points below its May 2 close
- The daily OBV has just broken out above its resistance, line d, as volume has picked up over the past two days
- Initial support is now at $31-$31.20 and the 20-day exponential moving average (EMA)
The iShares MSCI Malaysia Index (EWM) has just closed at new all-time highs and above resistance at line e. The continuation pattern (lines e and f) has upside targets in the $16.20-$16.50 area.
- A rally equal to the rally from the March lows to the May highs has targets in the $16 area
- The RS analysis versus the MSCI World Average broke through resistance in early June and looks very strong
- It made new highs last week and has again turned up. There is long-term RS support at line g
- The daily OBV has just closed above resistance at line h, as volume spiked on Tuesday
- EWM has minor support now at $14.92-$15.17 with the daily uptrend (line e) now at $14.85. This uptrend was violated on a closing basis last week
What It Means: Despite the weak US dollar in 2011, the fund flows have generally been out of the emerging markets and into US stocks. There have been exceptions, however, as the fund flows into Russia and the emerging market bond funds have been positive.
Both the Indonesian and Malaysian stock markets look strong, and the recent data on Indonesia’s inflation suggests they may not have to raise rates any further. These two funds look attractive for the global equity portion of your portfolio, but they will need to be monitored on a regular basis. EEM does not look like an attractive buy at this time.
How to Profit: For the Market Vectors Indonesia Index (IDX), go 50% long at $31.36 and 50% long at $31.04 with a stop at $29.97 (risk of approx. 3.9%). Sell half the position at $35.78 and raise the stop on the remaining position to $30.92.
For the iShares MSCI Malaysia Index (EWM), go 50% long at $15.16 and 50% long at $15.04 with a stop at $14.38 (risk of approx. 4.8%). Sell half the position at $16.74 and raise the stop on the remaining position to $14.67.
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