Discover Top Posts Tagged with #$vwo

Is The Next Wave Up “Emerging”?

A broad emerging markets index has broken above key resistance.

One theme in 2017 has been the emergence (no pun intended, this time) of stock markets from around the globe. Following years of U.S. dominance, foreign markets are playing catch-up, with many of them -- from Europe to Asia, developed countries to emerging markets -- exhibiting key breakouts.

One area that we have been focusing on over the past year is that emerging market space. There has been no shortage of big breakouts and key technical developments within that arena during that time. However, no bull market goes in a straight line. There will be points of resistance and struggles along the way, at least in the short-term.

Within the emerging market space, we identified a few months ago what we felt may be a major confluence of potential resistance in the benchmark MSCI Emerging Markets Index (EMI). Specifically, as we stated in the post, the confluence included

“a trio of key potential resistance points intersecting near the 1015 level:

The underside of the broken Post-2002 Up trendline that connected the 2008 lows

The Post-2007 Down Trendline that connected the peaks in 2011, 2014 and 2015

The 61.8% Fibonacci Retracement of the 2011-2016 Decline”

As it turns out, the 1015 level did indeed hold, almost precisely, as the EMI never got above that level by more than a few points over the next 2 months. However, one positive for the bulls was that the index never sold off too far below that level either. It kept bumping against that 1015 ceiling as if looking for a hole to pop through.

On Wednesday, it did indeed pop through.

Here’s a close-up look at the recent development.

So does this mean it’s off to the races again for the EMI? Maybe, maybe not. It certainly overcomes a major level of resistance due to the various lines clustered around the 1015 area. Therefore, further upside has immediately been opened to the EMI.

However, nothing is guaranteed in the financial markets. There is always the possibility that the breakout eventually fails and produces commensurate risk to the downside (that is a bear in the picture above, after all). Regardless, no position should go unattended without the application of some sort of risk-management overlay.

In a premium post at The Lyons Share, we’ll discuss the important things to monitor in measuring the success or failure of this breakout, the next key levels to watch in the EMI and how to potentially profit from such developments.

If you want that “all-access” version of our charts and research, we invite you to check out our new site, The Lyons Share. Thanks for reading!

Polar bear photo by Paul Souders and the grand prize winner of the 2013 National Geographic Photo Contest.

_____________

Disclaimer: JLFMI’s actual investment decisions are based on our proprietary models. The conclusions based on the study in this letter may or may not be consistent with JLFMI’s actual investment posture at any given time. Additionally, the commentary provided here is for informational purposes only and should not be taken as a recommendation to invest in any specific securities or according to any specific methodologies. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.

#$EEM #$EDZ #$VWO

Do Emerging Markets Really Need Higher Oil?

“Emerging markets are getting crushed: The oil crash raises the risk of a full-blown crisis in the emerging market world.” – CNN Money, February 2016

It’s a tale as old as time. Emerging Markets stocks “need” higher oil prices. Oil is said to be their lifeblood; without it they are doomed to a state of perennial crisis.

In markets investors prefer simple narratives, and lumping all Emerging Markets into one bucket with one driving factor (Crude Oil) makes investors feel good. For as long as they can predict which direction Crude Oil is going, they can predict Emerging Markets.

There’s only two minor problems with this logic:

1) Investors cannot predict the direction of Crude Oil any better than they can predict the direction of the dollar, interest rates, or the S&P 500.

2) Crude Oil is only one factor among many influencing the direction of Emerging Market stocks.

Going back to 1986, the monthly correlation between Emerging Markets (MSCI Emerging Market Index) and Crude Oil is 0.36. In plain English that means they often move in a similar direction. The key word in that sentence is often, which is far from always.

On a monthly basis, Emerging Markets and Crude Oil have moved in the same direction only 60% of the time, which means that 40% of the time they are moving in opposite directions (Crude up, EM down or Crude down, EM up).

Over the past year, this is precisely what we’ve seen, with the 1-year correlation dropping to record low of -0.58.

In 2017 thus far, Emerging Market stocks (EEM) are up over 16% while Crude Oil is down 14%.

What gives? This was not “supposed to” happen; Emerging Markets were “supposed to” be down.

Indeed, but they’re up. And as we know from history this is not the first time this has happened (remember, 40% of the time they are moving in opposite directions).

Why don’t they always move together? Good question. Perhaps it’s because the Energy sector is not even close to the most important sector in Emerging Markets. Financials and Technology far outweigh energy exposure the two most popular Emerging Market ETFs (EEM and VWO). Additionally, the Consumer Discretionary sector, which is often said to benefit from lower Oil prices, is roughly the same size as Energy.

Digging a bit deeper, only one major Emerging Market country has Energy as its highest weighted sector: Russia, at just under 50%. Unsurprisingly, Russia (ERUS) is down 7% this year and has a much higher monthly correlation with Crude Oil of 0.65.

If all Emerging Markets looked like Russia, the false narrative that Emerging Markets need higher Oil might have some element of truth to it. But alas, they do not. Emerging Markets may move with Oil more often than not, but that is not the same thing as saying they are dependent on it. Do not confuse correlation with correlation. Just because something moves with something else does not mean something is moving because of something else.

The lesson here: don’t invest based on stories, no matter how good they sound. Do the work, evaluate the evidence, and think for yourself.

***

Storytelling Animals

Does the S&P Really Need Higher Oil

An Emerging Divergence in Central Bank Policy

When Bond Kings Short Emerging Markets

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This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

CHARLIE BILELLO

Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts. He is the co-author of four award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors and previously held positions as a Credit, Equity and Hedge Fund Analyst at billion dollar alternative investment firms.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.

You can follow Charlie on twitter here.

#$EEM #$VWO #$IEMG #$USO

Storytelling Animals

"People think in stories, not in facts, not in numbers, not in statistics. We are a storytelling animal." – Yuval Noah Harari, Masters in Business

“All lies and jests, still a man hears what he wants to hear and disregards the rest.” – Paul Simon, The Boxer

In December 2015, the Federal Reserve was preparing to hike interest rates for the first time since 2006. The media had a story angle involving Emerging Markets and they were sticking to it…

“US Rate Rise Could Hurt Emerging Markets” – WSJ, Dec 2015

"These countries [all Emerging Markets] are most at risk from U.S. rate hike." - CNN Money, Dec 2015

“Fed rate hike to put pressure on emerging market corporates in 2016” – Reuters, Dec 2015

“EM faces ‘taper tantrum’ as US prepares to hike” – CNBC, Dec 2015

“Why a rate hike by the Fed could have a devastating impact on some people [Emerging Markets] around the world” – Washington Post, Dec 2015

“Why rising interest rates are bad news for emerging markets.” – The Conversation, Dec 2015

At the time, I was called by one of these fine outlets and asked the following question: “Emerging Markets are going to get crushed by the Fed Rate hike. This is an absolute disaster, right? Can I get a quote on that?”

I paused for a moment to think about the question. The longer I’m in this business, the lower my tolerance for bullshit. My bullshit radar here was at 100%.

This was my response…

I don’t give quotes but perhaps I can provide some historical perspective to your story.

1) Let’s start with 1998. The Fed cut interest rates 3 times that year, from 5.5% down to 4.75%. Emerging Market stocks had (at the time) their worst year on record: -26%.

2) In 1999, the Fed hiked interest rates 3 times, from 4.75% to 5.5%. Emerging Market stocks had one of their best years in history: +66%.

3) From January 2001 through November 2002, the Fed cuts rates from 6.0% down to 1.25%. Emerging Market stocks fell 7% during this period.

4) From June 2004 through June 2006, the Fed hiked rates from 1.00% to 5.25%. They did not cut rates until September 2007. From the June 2004 rate hike until the rate cut in 2007, Emerging Market stocks advanced 179% versus a return of 42% for the S&P 500.

5) From September 2007 through December 2008, the Fed cut rates from 5.25% down to 0%. During this time Emerging Markets stocks fell 41% versus a decline of 36% for the S&P 500.

Needless to say, this historical perspective was not what the reporter was looking for. There was no quote of mine included in the article as it did not fit into the bearish Emerging Market narrative they were shooting for. As Paul Simon said, people hear what they want to hear and disregard the rest.

Fast forward to today and the Fed has hiked interest rates 3 times since December 2015. Has the Emerging Market crisis materialized? Not exactly.

1) Emerging Market stocks have advanced 25% since the first rate hike versus a gain of 18.6% for the S&P 500.

2) Emerging Market High Yield Bonds have advanced 22% versus a gain of 17% for U.S. High Yield Bonds.

3) Emerging Market currencies (CEW) have advanced 10% while the Dollar Index (UUP) is slightly lower.

And so thus far Emerging Markets seem to be holding up quite well in the face of Fed hikes, as they did previously in 1999 and 2004-06.

To be clear, that doesn't mean they will continue to do well or have to do well. There is no simple rule as to what Emerging Markets will do in response to Fed policy. If there was this game of investing would be easy but as we know it is anything but. Emerging Markets could go down from here or they could continue to go up. One must understand that its direction is determined by of a multitude of factors, only one of which is U.S. interest rate policy.

The more important takeaway here is to be wary of narratives of convenience that are devoid of any evidence. Let the media and the many pundits tell their stories. It is their job to do so; it is their job to entertain and explain. It is your job as an investor to detect their bullshit and learn to ignore it. As we are “storytelling animals,” this is by no means easy. But ignore it you must if you want to have any success in this most difficult of businesses. For there is certainly no edge in believing in fairy tales while there just might be one in ignoring them.

***

Fed Rate Hikes and Stock Market Returns

Are Equity Returns Dependent on Easy Money?

An Emerging Divergence in Central Bank Policy

When Bond Kings Short Emerging Markets

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CHARLIE BILELLO

You can follow Charlie on twitter here.

#$EEM #$VWO #$IEMG #$SPY

An Emerging Divergence in Central Bank Policy

We’re closing out the first quarter and Emerging Markets are leading equities higher, with the MSCI Emerging Markets ETF (EEM) up 13.40% versus 4.95% for U.S. large caps (SPY) and 0.18% for U.S. small caps (IWM).

After many years of lagging returns in Emerging Markets, this is a notable gap. The possible explanation? I wrote of some of the tailwinds for Emerging Markets in a post last year: relatively cheap valuations with improving credit, improving currencies, and negative sentiment. All of these factors have been helpful in driving Emerging Markets up more than 40% from their lows.

Today I want to highlight an additional positive factor that I have been tweeting about in recent months: a divergence in central bank policy.

For a number of years, the developed world was maintaining a very easy monetary policy while most Emerging Market countries were tightening. Faced with currency depreciation and higher inflation, they had little choice in doing so.

Over the past year, that backdrop has changed. While the U.S. has hiked rates, India, Russia and Brazil have eased. The impetus for these moves are twofold:

U.S. policy has been overly easy (negative real rates) while Emerging Market policy has been overly restrictive (positive real rates).

U.S. inflation has been moving higher while Emerging Market inflation has been moving lower.

Let’s run through a few charts to illustrate.

First, you’ll note in the table below that most of the developed central banks are maintaining negative real interest rates while most of the emerging world have positive real rates.

Second, while U.S. and European inflation have been moving higher…

Emerging Market inflation has been moving lower…

The improving inflation picture and increased ability to ease has been a tailwind for Emerging Markets over the past year. Will that continue? I don’t know, but with real interest rates still positive by a good margin, they still appear to be in a better position than the developed world.

And with U.S. equities outperforming Emerging Markets by more than 100% in the past seven years, the opportunity for mean reversion remains.

***

When Bond Kings Short Emerging Market Equities

Is the Great Divergence in Central Bank Policy Sustainable?

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CHARLIE BILELLO

You can follow Charlie on twitter here.

#$EEM #$VWO #$IEMG #$SPY

Will Improving Earnings Help Push Stocks Higher?

U.S. Earnings Improve

With the economically-sensitive Australian dollar (FXA) and Brazil (EWZ) showing signs of strength in 2016, there is hope for an earnings recovery in late 2016/early 2017. From The Wall Street Journal:

This is the corporate landscape that will greet the next president: improving profits buoyed by rising employment and business spending—yet tempered by the elusiveness of a more resilient recovery. Earnings for the biggest U.S. companies began to rebound in the third quarter, a glimmer of growth after four straight quarters of contractions. But some executives are already expressing caution about the coming year.

S&P Spikes On FBI/Clinton News

Following the FBI’s announcement Sunday regarding the Clinton email case, S&P futures gapped up 25 points, allowing the S&P 500 to flirt with recapturing the top of the Brexit box (see orange lines below). All things being equal, the short-term bullish case would improve with a close above the orange lines.

Normal Pullback or New Bear Market?

This week’s video looks at the good, the bad, and the ugly heading into election day, including an update on numerous Fibonacci retracements.

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.

Some Good Signs Monday

Market breadth was very impressive during Monday’s session, especially with 90% of NYSE volume being associated with advancing issues. As shown below, the broad NYSE Composite was also able to retake a level that dates back to the 2007 market peak.

A Turning Point For European Earnings?

European financials were trying to make a stand at a logical level Monday (chart below). Similar to the United States, some data is giving hope for a long-awaited recovery in European earnings. From CNBC:

After almost six years of no earnings growth for Europe, there is hope the region’s companies hit an inflection point during this year’s third quarter, according to the Head of European Equity Strategy at UBS. With over half of European companies having already reported, Nick Nelson says the recovery seen in revenue growth is key to driving positive momentum in earnings.

#$FXA #$EUFN #$EWZ #$VWO #$FEZ #$EFA #$VTI #$SCHB #$SCHX #$SCHF #$XLF #$EZU #$EWG #$VFH #$KBE #$VXX #$VXN #$SH #$SDS #$PSQ

A Tale Of Two Very Different Markets

Intermediate-Term vs. Long-Term

With concerns related to next week’s election and the strong possibility of a December rate hike, the stock market’s intermediate-term profile has shown some significant deterioration in recent weeks. From MarketWatch:

U.S. stocks ended a volatile session with modest losses on Friday, pressured by the surprise announcement that the Federal Bureau of Investigation was restarting a probe into Hillary Clinton’s emails, adding a new dose of political uncertainty into the market.Major indexes had traded higher earlier in the session, supported by a strong GDP reading, but the news prompted a turnaround and extended the week-to-date declines of the S&P 500 and Nasdaq. However, indexes also ended well off their lows of the session as investors digested the news and its potential implications for the coming election.

In the S&P 500 chart below, the 50-day moving average (blue) helps us monitor the health of the intermediate-term trend; the 200-day moving average (red) assists with the market’s long-term trend. The 50-day recently rolled over, which is indicative of waning intermediate-term momentum. Currently, the slope of the 200-day looks quite a bit better than it did before the 2016 New Year’s plunge, telling us the present day long-term outlook is quite a bit better than it was on January 1, 2016.

Possible Buying Opportunity

Given current valuations and the relatively disappointing state of global growth, it is easy to understand the long-term bearish case. Is there any long-term evidence that can help us keep an open mind about better than expected long-term outcomes? The answer can be found in this week’s video.

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.

From a fundamental perspective, a recent MarketWatch headline, “Residential Building Can’t Keep Pace With Seattle’s Surging Job Market”, seems incongruent with the end of the world is around the corner theory. From the article:

Seattle’s growth isn’t a new story, but defining its size and impact is often difficult. Companies are often tight-lipped about hiring numbers. Based on multiple reports, though, just four local companies are planning on hiring an additional 10,000 employees in the coming year. There’s phenomenal job growth throughout the region across dozens of large organizations, but by simply focusing on Amazon, Google, Facebook, and Microsoft, the region needs to build an additional 10,000 housing units within a reasonable commute distance to keep our housing situation from becoming more constricted.

A Four-Month Comparison

In the chart below, notice how the S&P 500’s 200-day moving average had been falling for four months prior to the ugly stock market plunge in January 2016 (see slope of thick red line). Compare and contrast the last four months of 2015 to the last four months in 2016 (slope of red thick line vs. slope of green thick line). The market’s risk profile, from a long-term perspective, looks better today relative to late 2015/early 2016.

The present day look of the 200-day does not eliminate concerns related to waning intermediate-term momentum (looking out several weeks). Sharp declines can occur within the context of a rising long-term trend.

Summary

Until some observable improvement occurs, the market is susceptible to further downside in the coming weeks. If the S&P 500 can recapture and hold above its 50-day moving average (2,155), it would help reduce some of the short-term pressure.

If the market’s long-term trend remains intact, any short-term pullback may represent a buying opportunity, which means it is prudent to maintain a high degree of flexibility. Two anecdotal examples of a “buying opportunity” pullback are August 2015 and the recent Brexit sell-off in June of this year; both periods required a high degree of bull/bear flexibility.

If the market’s long-term trend starts to deteriorate, which is possible, the buying opportunity component would be negated from a probability perspective. As shown in the chart above, the S&P 500 has a band of possible support between 2,134 (2015 high) and 2,100 (area of prior resistance). Time will tell.

#$IWN #$IWM #$MDY #$RSP #$VWO #$VTI #$IVV #$EFA #$USO #$VXN #$VXX #$XKE #$XLY #$XLP #$XLU #$XLK #$AGG #$TLT #$GE #$GM #$AMZN #$FB #$FDN #$QQQ

Is The Party Over For Stocks And Gold?

#$VWO #$GLD #$AUG #$SPY #$GDX #$SIL #$IWM #$IVV #$^GSPC #$^DJI #$IWF #$VEA #$QQQ #$VTI #$VUG #$XLE #$TIP #$IJH #$VTV #$IWD #$EEM #investing #gold #stocks #$XLF #$XLP #$DVY #$MDY

A Clear, Factual, and Important Message About Stocks

Hard Evidence Was Helpful Near Major Turns

The chart below shows the S&P 500’s 200-day moving average between 1998 and 2010. Given the S&P 500 dropped by over 50% on two separate occasions in that period, it was helpful to have tools to monitor the market’s risk-reward profile.

What Are The Charts Telling Us Today?

This week’s stock market video goes beyond the S&P 500 to help us gain a better understanding of the market’s bigger picture tolerance for risk. Numerous markets are covered, including gold, silver, and energy. The broader analysis can provide insight beyond the widely followed S&P 500.

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.

Weekend Reading

If you are new to our posts and would like to dig a little deeper, the recent posts below contain additional examples of “evidence we have in hand”.

Is This Long-Term Volume Signal A Warning Flare For Stocks?

How Does 2016 Compare To Stock Market Peaks In 2000 And 2007?

These 4 Charts Say A Lot About The Stock Market

Stock Rally Is Based On More Than Just Central Banks

2016 Investor Fund Flows Nothing Like Excessively-Optimistic 2007

Will The Jobs Report Induce Another Waterfall Plunge In Stocks?

Messages From Emerging Markets And Cyclicals

#$SPY #$^GSPC #$VOO #$VTI #$VWO #$EEM #$VXX #$VXN #$GDX #$SLV #$GLD #$GDXJ #$^IXIC #$QQQ #$VGT #$DOG #$DIA #$SDY #$DVY #$VNQ #$IYR #$XLU #$XLF #$XLE #$XLB