Chart of the Day – $EEM At 2 Year Resistance

by Enis July 24, 2014 2:28 pm • Commentary

Emerging markets have outperformed developed markets since mid-March, a change in character after several years of severe underperformance.  The headlines in emerging markets have improved in certain areas (India and China most notably), while headline risk has remained most notable in Russia and the Middle East.

EEM is now at a 2 year high, which is a crucial technical level for the ETF on a 5 year chart:

EEM weekly chart, Courtesy of Bloomberg
EEM weekly chart, Courtesy of Bloomberg

Looking at EEM’s 5 year chart, it’s pretty amazing to consider that emerging market stocks are only flat over the past 3 years, while the S&P 500 has risen 50% in the same period.

I discussed the relative fundamental valuations of emerging market stocks vs. U.S. stocks in a Macro Wrap post in August 2013:

The valuation differential is starting to favor emerging markets.  The bad news there seems to be more than priced in on a relative basis.  However, psychology is the driver in the short-term.  The U.S. overweight has worked for investors this year, so they’re content to stick with it for now.

The S&P 500 continued to outperform EEM until mid-March, and the relative valuation differential became even more extreme (more than I initially expected).  Compared to Aug 2013, the SPX has still outperformed EEM by nearly 5%, so the relative valuation argument looks even more attractive today.

I still expect emerging market stocks to outperform U.S. stocks over the course of the next 5 years.  In the short-term, however, EEM might run into some resistance here near $45 given the technical importance of that level.