Are Emerging Markets Finally Hitting “Knife-Catching” Levels?


The beleaguered MSCI Emerging Markets Index is hitting a potentially key level on its chart.

What a wild beginning to the new year, with U.S. stocks off to their worst start ever by some measures. This has definitely made for no shortage of Chart Of The Day (ChOTD) worthy charts. Given the meltdown over the past week you might think we’d choose a metric related to the washed-out, oversold condition in this market as our ChOTD. Well, there are plenty of interesting candidates in that regard, which you should be able to locate fairly easily among the technical analysis gurus on social media. Long-story short there – markets are very oversold, to the point where, historically, the short-term risk-reward ratio is heavily skewed to the upside.

That said, in this kind of tape, things can get even more out of hand to the downside in the very near-term before the “expected” bounce unfolds. Furthermore (and this is, in our opinion, a critical point), as yesterday’s post indicated, various indices broke extremely consequential levels yesterday, which may have tilted the longer-term balance of power from the bulls to the bears. That is, yesterday’s break may potentially have been the start of something negative, longer-term, rather than nearing the end of your run-of-the-mill short-term dip. While not tied directly to our ChOTD, we just wanted to provide some updated color on these ongoing developments.

So what is the ChOTD today? It is a simpler, more straightforward price chart of…the MSCI Emerging Markets Index (EM). What is so special about EM during this time of short-term upheaval in U.S. markets? Well, folks like to say regarding the action of the past few years in the equity markets that the U.S. is the cleanest dirty shirt. To continue the analogy, Emerging Markets would be the dirtiest dirty shirt.

After moving sideways for 4 years following a top in 2011, EM has been bludgeoned over the past 12 months. Consider EM the equity equivalent of crude oil (which, not surprisingly is highly correlated with many emerging markets). This nearly 5-year drought has resulted in anxious investors and traders taking stabs at catching this EM “falling knife”. Thus far, this endeavor has only resulted in bloodied hands. That said, the knife-catchers’ best opportunity yet may be at hand.

Folks who read our blog probably know by now that our preferred method of investment selection revolves around the concept of relative strength. That is, we like to concentrate our portfolio in strong-performing areas as opposed to attempting to catch falling knives in hopes of a mean-reversion bounce. That said, readers may also be aware of the fact that we only attempt a knife-catch at major support levels.

One such level (as readers again may be aware) is the 61.8% Fibonacci Retracment from major price junctures. And it just so happens that the MSCI Emerging Markets Index is right on top of the 61.8% Fibonacci Retracement level of its rally from 2008 to 2011. Knife-catchers, this may finally be your spot!


As the chart shows, the 61.8% Fibonacci Retracement of the 2008-2011 rally sits at about 741. Today’s close was 739. Now, given the downward momentum in global markets, there certainly could be a slight overshoot to the downside before a solid bounce materializes. Additionally, the index’s post-2002 Up trendline sits just below current levels, so that could provide more support in the case of a temporary breach of the Fibonacci level.

But what of our “key breakdown day” yesterday? That is a valid point and a valid concern. An accelerated downdraft in the U.S. and other vulnerable markets would almost certainly have some effect on EM. However, markets don’t always line up in an orderly, predictably inter-connected manner. Most often, there are scattered bullish and bearish data points which a manager must reconcile. Often, our favored approach is to not reconcile them at all, but rather treat each market and piece of data on its own merits. That is, treat the bullish markets favorably and the bearish-looking markets cautiously.

Therefore, while we have major concerns about this week’s key breakdown in the U.S. equity market, the long-beleaguered Emerging Markets have arrived at the level that we have earmarked for some time as a potential support zone. Therefore, if one is not averse to knife-catching attempts, go ahead and take a, er, stab at it (though, in the current environment, you may want to wear gloves when doing so).


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The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.