EEM and the Re-emergence of Emerging Markets

One of the best short-term trades for active investors in 2011 was selling short emerging markets as they become overbought in bear market territory. And with many of these emerging markets funds making strong gains again in January, traders eyeing these ETFs are likely wondering if the trading in exchange-traded funds like the iShares MSCI Emerging Markets Index Fund ETF (NYSE: EEM) will be as good once again in 2012.

Heading into trading on Wednesday, shares of EEM are back in overbought territory after closing higher for a second day in a row and gaining more than 2%. Should the fund remain at these levels or, more to the point, continue higher and deeper into overbought territory below the 200-day moving average, then the likelihood of EEM attracting both sellers and short sellers shortly afterward will increase. The last time EEM traded for more than a day at similarly overbought levels, in late November/early December, the stock fell more than 6% over the following five trading days.

Also rallying into overbought territory below the 200-day moving average were more specific country funds like the Market Vectors Russia ETF (NYSE: RSX), up well over 2% in Tuesday’s trading, and the WisdomTree India Earnings Fund ETF (NYSE: EPI). EPI, which represents the equity markets of India, bounced by more than 4% on Tuesday, as traders aggressively took advantage of the fund’s underperformance relative to other single country emerging markets funds. Similar gains less than a month after trading down to 52-week lows were to be found in other Indian ETFs like the PowerShares India Portfolio ETF (NYSE: PIN) and the iPath MSCI India Index ETN (NYSE: INP) which added nearly 4% and just over 4% respectively in trading on Tuesday.

It’s hard to have a conversation about BRIC nations like Russia and India without addressing the other half of the BRIC quarter: Brazil and China.

Brazilian stocks finished higher by more than 2% on Tuesday, closing in overbought territory for the second time in a row and still trading below their 200-day moving average. The gains in iShares MSCI Brazil Index Fund ETF (NYSE: EWZ) help set a new, short-term high in the fund, which will take “consider avoiding” ratings of 3 out of 10 into Wednesday’s trading session. EWZ has a negative edge of more than one and a half percent.

Also gaining more than 2% ahead of trading on Wednesday and earning “consider avoiding” ratings in the short-term is the iShares FTSE/Xinhua China 25 Index Fund ETF (NYSE: FXI). FXI, like EWZ, has finished for two sessions in a row in overbought terrriory, and has a short-term, negative edge of well over one percent. FXI also shares with EWZ a 3 out of 10 rating, putting the stock in our “consider avoiding” category.

Note that FXI is a position in Larry Connors’ Daily Battle Plan as of Tuesday’s close. The Battle Plan Model Portfolio is short FXI. Learn more about the Battle Plan here.

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David Penn is Editor in Chief of