Emerging markets on the Comeback trail
Key Takeaways
- Monday’s rally was largely Technology dominated while over half the major Equal-weighted sectors finished down on the day.
- Emerging markets are slowly but surely recovering and Latin America looks bullish
- Brazil looks to play Catch-up to the strength that Mexico has shown and looks attractive
Markets rallied moderately Monday though SPX underperformed QQQ, as the latter rallied over 2% on the day. Interestingly enough, over half of all Invesco’s equal-weighted ETF gauges were lower by the close, showing just how important Technology remains to the SPX and QQQ’s progress. With regards to SPX, last week’s 4637.50 looks key as resistance, while 4507.57 remains minor near-term support. Given evidence of late March’s rally being breached late last week, this snapback pattern still points for lower prices with SPX pulling back to potentially test 4455 before prices can make further progress on the upside. Most shorter-term cycles call for weakness into 4/11-12th before a rally into April expiration. Thus, one has to watch if SPX gets under 4563 and certainly 4542 has importance as a negative which would confirm that prices fall to new lows for April. Over 4637 would be seen as a positive for further upside follow-through.
Emerging Markets look to be rebounding
In the last few weeks, we’ve seen Emerging markets show an even stronger rally than that shown by Domestic Equity indices. Some of this has been recoveries in China, while India has pushed back to within striking distance of all-time highs. As I’ll show later on in this report, the Latin American space looks particularly bullish to show further technical strength in the weeks/months ahead.
Below is a ratio chart of the EEM, the Ishares MSCI Emerging Markets ETF, vs the IDEV 0.75% , the IShares Core MSCI Developed Markets ETF. Interestingly enough, this recent breakdown into March proved short-lived despite the US Dollar still trending higher. Importantly, just in the last week we’ve seen this Ratio of EEM/IDEV push back above its prior low.
Technically speaking, this is a promising development that suggests Emerging markets likely can perform a bit better in the weeks ahead. While it will take some time before February peaks are exceeded (which would drive intermediate-term gains) this is a constructive first step to think the EM space likely has found its footing and can start to trade a bit better going forward.
Latin America close to breaking out of long-term downtrend
Interestingly enough, ILF 1.87% , the Ishares Latin America 40 ETF, is very close to exceeding downtrends extending back since Spring 2008 peaks, nearly 14 years ago. Any weekly close back over $32.50 would exceed last June 2021 highs which argues for a move to the low to mid-$40’s without too much trouble.
ILF recently has made a much higher low in December 2021 than what happened back in March 2020 and has immediately rallied up to within $1 of prior peaks, which has helped to jump-start momentum.
Overall, ILF 1.87% is comprised of stocks which are over 61% from Brazil, 24% Mexico and 6.5% from Chile. Mexico had taken an early lead in making intermediate-term breakouts, but it now looks like Brazil is starting to play catchup. The top five holdings comprise over 40% of this ETF, and are all technically attractive to consider for intermediate-term longs. These are as follows: VALE, PBR 0.00% , ITUB 3.11% , AMX 2.90% , and BBD 2.64% .
As shown below, prices have moved up sharply to test this area of trendline resistance that has been tested no less than three previous occasions since it peaked out over 14 years ago. Given that Emerging markets slowly look to be on the comeback trail, keeping close eyes on Brazil and putting buy alerts on ILF if this breaks out would allow one to enter longs at a very attractive area.
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