Opportunity in Emerging Markets

August 11, 2023No Comments


Hello and welcome once again to the Smart Money Dumb Money Show. And I am your host, as usual, Keith Richards. I’m the president and chief portfolio manager at ValueTrend Wealth Management. And today, I’m not recording this from my office, in fact, I’m recording it from my living room. I’m sitting on a nice big comfy couch. You might hear chainsaws and stuff like that in the background. I’m having to stay home to supervise work with some people that are taking some huge rotten trees down in my backyard. So, we’re gonna talk about emerging markets today, and this is a subject that ties into my enthusiasm about gold of late, and you’ll see why I want to give you some charts on the emerging markets themselves, as well as some charts on the dollar versus emerging markets and that kind of thing. And as you know, one of the reasons I like gold is because of a hedge on the US dollar.

 

Now, I just wanna start off before we get into the charts by saying that one of the things you have to keep in mind when we say the words emerging markets and we talk about NETF or N Index that represents the emerging markets, you’re really bunching a whole bunch of economies, a whole bunch of countries markets into one lump sum. And it’s not necessarily a fair relationship, just like saying Europe, Europe has many moving parts. Heck, North America has many moving parts between, you know, Mexico, Canada, US, we all have different economies. Canada’s more resource-based, US is more tech-based, et cetera. So it’s not a perfect relationship when we say these are the emerging markets and this is an index that represents them. But for the purposes of this study, I’m going to just talk about the index to keep it simple.

I do encourage you that if you like the look at the chart, you do some digging in the individual countries and decide for yourself if you want to try to add beta over anything we talk about today about the broad index to buy specific countries. The other thing you should keep in mind is China’s a big part of the emerging markets MSCI index. So just keep that in mind. So you have to have at least a reasonable amount of enthusiasm about China. Although it’s not all about China, you still have to not hate the Chinese market from a technical perspective before you buy into the emerging markets index itself. So I’m gonna share screen and I put together kind of a rough PowerPoint and I am, going to start from the beginning. So this chart, series that I’m gonna show you was put together on August 2nd. So by the time you see this, it may be a week old, but it’s not that behind.

I wanna start off with the emerging markets seasonality. Now, a lot of sectors, for example, have very, very strong tendencies during certain times of the year, and that includes gold that I have been harping on a little bit lately. You can’t really say that about emerging markets. They’re pretty volatile. They often march to their own drum. However, there is one period of the year that you want to at least take a look at emerging markets from a seasonal perspective. And that’s right now, you can see on the chart, Courtesy at Equity Clock, that’s somewhere around the mid to late part of August into the mid part of October is their single best time period from a seasonal perspective to own the emerging markets. Remembering again, that’s a pretty broad stroke when we say emerging markets, but generally speaking, they do pretty good this time of the year.

Hence one of the reasons I’m doing this video. Alright, let’s take another thing. Look at something else. We can look at seasonals as a backdrop, but we really gotta rely on the technicals to get involved with the position. Now, I don’t talk about cycles a lot, but I did notice a little bit of a rhythm to the emerging markets index. And this is the EEM index, iShares, EEM ETF that’s traded, uh, on the New York Stock Exchange and it’s a representative of the MSCI emerging markets index itself. So it’s, very much the same thing. So it’s a good representation of that cluster of countries I, through Value Trend, we have been buying into the emerging markets. We don’t own this particular ETF, we do own the BMO ETF, which is a slightly different formula, but pretty similar looking charts.

So it’s not a disclaimer or the, sorry, a representation that you should be buying this or any, including the BMO, emerging markets ETFs. There is more risk, as you can see on the chart. They’re not necessarily a straight line move up kind of chart. You have to trade it. But, I did wanna say that we are buying this index and one of the reasons why we just started nipping in, and we do things in stages, we don’t jump in with two feet, is because of there, seems to be some sort of a cycle on emerging markets. And on this index, and you can see that it’s, it’s roughly three to four years. Now, I’m not a believer that cycles have to be precise. They have to be, they’re just a rhythm, they’re a rough estimation of when, uh, troughs and peaks might occur.

Typically, when you’re measuring a cycle, you measure from trough to trough. So that’s what I’ve done here. And you can see, well, there’s about four years there, there’s about three years there, about four years there, closer to four there, three years here. But the point is that we’re kind of due an upswing whether this is going to be another three years or just, uh, or up to four years as a cycle, we’re due an upswing if this cycle is accurate. So there’s one technical piece of evidence that might suggest we should be looking at emerging markets. So I’m gonna look at next the relationship between emerging markets in the US dollar. And this is important because, you know, if you’ve been watching my videos on gold and my conversation with Brooke Thackery on the bicycles recently, and even on BNN recently, I made gold, one of my top picks.

Why? Because I think the US dollar’s going to be weak, not necessarily selling off more, but it could just sort of be stagnant and that opens the window for buying non-correlated assets to the US dollar. So let’s take a look. The black line is the US dollar, and I’ve drawn black arrows to note the general trend. And the red line is the emerging markets index, EEM. So at the bottom before I get started on the chart above, I want you to notice this chart, which is the correlation line. And, so long as this line which measures the relationship and performance between these two entities up here, the US dollar and the emerging markets index, so long as it’s below the zero line, which is this horizontal line, you have a negative correlation. Negative means moving opposite.

And you can see most of the time, most of the time emerging markets have a pretty negative relationship to the US dollar. So if you believe as I do that the US dollar will not necessarily be super bearish, but most certainly could be, uh, sideways over the next little while and underperform some of the other currencies out there, especially with the new credit downgrade that we got from Fitch, or they got from Fitch I should say. Um, then there’s an argument for looking at non-correlated or negatively correlated assets to the US dollar. And emerging markets in general are. So again, this is the US dollar in black, this is the emerging markets, stock country index in red. Take a look at how pretty perfect it’s been as far as negatively cover the, uh, assets. So when one zigs the other zags. So what I want you to notice is that on the right hand side of the page, emerging markets were underperforming and the US dollar was outperforming. But now we’ve been seeing the US dollar just very recently in the past number of months, say six months or so, the US dollar, the black line has been going down. In other words, it’s underperforming. Meanwhile, the emerging markets stock index has been going up. So negative correlation. So this is kind of interesting, it’s another piece of evidence. We’ve got a potential seasonal cycle. Now we’ve got a potential cycle,

within the rhythm of the emerging markets, chart that may be coming due for more upside. And now we’re seeing a negative relationship to the US dollar. And the US dollar seems to be declining, at this time and/or underperforming. So last chart I wanna show you is just a plain old EEM chart with no indicators on it at all. Do we wanna cloud our vision here? We just wanna see exactly what the chart’s telling us. And you can see that we’ve got a potential head and shoulders bottom here. Now you guys know, if you took my Technical Analysis course, I do not get tied up in the ‘name that formation’ game. I call everything either an uptrend, downtrend or consolidation. That’s all that matters. So clearly the emerging markets were downtrend and they’ve based, so they’re in a consolidation, they’re in a base, call it a head and shoulders if you want.

The most important thing to look for, is if a stock or an index is basing watch for a breakout. Now, we’ve been buying in through this because we started buying down here on this little breakout, okay? So we’ve made a little bit of money on, on the emerging markets ETF, but we will not leg in until this bigger chunk of resistance, which I believe falls in and around the low 40, the $40 or so range. So when that, when this next level neckline breaks, we will be buying another chunk. The target then would bring us to somewhere around $46, $47. Okay? That was an old support level when the, when the stock topped and, and kind of died. And then the next level would be the old highs. And you can see it, it didn’t just kind of hit it and fall it tested at once.

So that’s, that’s probably going to be a good resistance point, and a possible target if, we take this first target in the mid to high forties and that would bring us really into the mid to low fifties. So there’s plenty of potential here. And what I’m looking at is enough evidence from seasonal perspectives, from looking at the dollar and its relationship to emerging markets to the cycle that we looked at and just to this, to the stock chart itself, that there’s a decent chance of making some money on the emerging markets. As I said, I’m disciplined and you should be too. So we leg into things. But if you like this idea, either look at buying an index and leg in just a little bit, okay? Don’t go in with both feet, never do that. Second thing, if you wanna add even more alpha, I really do encourage you to tear apart the index ’cause we have, and we’ve bought some individual emerging markets, ETFs as well. So the evidence is there for a possible

Move. You never know, you gotta put stop losses. Mental, stop losses are preferred on any position you buy that’s like this, especially in a more aggressive type of security environment like the emerging markets. But this could work out quite well and I’m putting my money where my mouth is because we’ve been buying it. And so far it’s been a pretty good trade. We’re only in it early. But, we do plan on adding more, if as and when the charts break out. So I hope this helped you and next video I would expect will be from the office, but hey, I put on the bow tie for you. Alright, you guys have a great week and we’ll be back again. Thanks for watching.

 

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