Ring of Fire: 3 Red Hot Emerging Markets ETFs for Tuesday

Geographically speaking, the “ring of fire” refers to a horseshoe-like band of exceptionally high volcanic activity around the edge of the Pacific Ocean. But for traders who overstay their welcome in any one of a number of Pacific-oriented ETFs, “ring of fire” could end up refering accurately to the hole in their portfolios where a profitable position used to be.

The three exchange-traded funds I’m referring to are the iShares MSCI Australia Index Fund ETF (EWA), the iShares MSCI Malaysia Index Fund ETF (EWM) and the iShares MSCI Pacific ex-Japan Index Fund ETF (EPP). All three of these exchange-traded funds have closed higher for five days in a row and are increasingly technically overbought. In fact, all three funds are at their most overbought levels in months. And our research suggests that these levels are increasingly unsustainable. Why?

The gains these funds have made in a short period of time are impressive. The Australian ETF, EWA, rallied more than 15% from its closing low on Friday, October 3rd to Monday’s close. Over the same time period, the Malaysian country fund gained more than 8%, while the Pacific ex-Japan Index Fund added nearly 14%.

In any market, gains like these would likely invite profit-taking. And in a market as skittish as the current one, traders should be all the more alert to the possibility of profit-taking, potentially severe profit-taking, in these otherwise, high-flying ETFs.

All three exchange-traded funds in today’s report were drawn from the data and research available thorugh The Machine. To find out more about The Machine, click here.

David Penn is Editor in Chief of TradingMarkets.com