Emerging market equities appear to have turned a corner from their recent intermediate term downtrend. In the chart below of the emerging markets stock ETF, EEM, you can see it declined almost 25% since it peaked last March. Since finding a bottom in late October the index began to rally at the same time US stocks were falling, reflecting relative strength. Additionally, RSI momentum has moved from being oversold to approaching its first overbought condition since January of last year, something the EEM bulls want to see. And for those, like myself who want confirmation of a trend change instead of trying to pick bottoms, the index has formed a series of higher highs and higher lows, the final signal it’s time to commit some investment capital.
Even though a bottom may be established in any investment opportunity there is no reason to invest in it unless it is going to outperform the current alternative leader. The winner of your investment capital war should be the one that will provide the greatest gains, right? In the bottom pane is a ratio of EEM to SP500. A quick refresher is when this ratio is falling EEM is underperforming and telling you that the SP500 deserves your investment capital. If, on the other hand the ratio line is rising, the alternative is true identifying the emerging markets as the better choice. As you can see the ratio began to bottom and formed a very nice rounded saucer pattern indicating a change in direction and shows EEM is outperforming on a relative basis the SP500.
The weight of the information the chart presents a strong enough argument for me to invest, how about you?