Friday, February 15, 2008

A buying opportunity in Emerging Markets?

Emerging market equities have been the leaders in the last bull phase of the equity market. Technically speaking, the accompanying chart of the iShare MSCI Emerging Markets ETF (EEM) relative to the S&P 500 shows they are currently undergoing a high level consolidation but the relative uptrend remains intact.

A check in with the smart money shows that the smart funds have a higher exposure to emerging markets or emerging market-like stocks than the consensus. These are all encouraging signs for emerging market equities. There is no doubt that these stocks tend to more volatile than US equities and are at risk of underperforming should the US go into a deeper or more prolonged slowdown than expected. However, I would give the emerging markets the benefit of the doubt but enter the trade with a fairly tight stop. Should the relative chart of EEM vs. SPX break its relative support line, that would be the signal to get out.

Full disclosure:
I have a long position in EEM.

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