Sellers Await New Highs in Emerging Markets
Traders and active investors have been re-calibrating their European anxieties – and buying European stocks. And with the outlook in early December significantly less pessimisstic than it was a few months ago, it is no surprise to once again see buyers on the offensive in shares from the Continent.
But traders have also been busy on the buyside of shares from markets in places like Brazil, India and Australia, as well. Up more than 2% and closing higher for a fourth day in a row was the iShares MSCI Brazil Index Fund ETF (NYSE: EWZ) on Monday. Also finishing higher for a fourth day in a row were shares of WisdomTree India Earnings Fund ETF (NYSE: EPI). Even more overbought is the iShares MSCI Australia Index Fund ETF (NYSE: EWA). Gaining more than 1% in Monday’s trading, shares of EWA have now finished in overbought territory for six consecutive sessions.
Properly speaking, Australia is not exactly an emerging market. But Australian economic growth has become very dependent on the growth of emerging neighbors such as Indonesia, Malaysia and China, making EWA an ETF very much worth watching in concert with emerging markets funds, especially in the Eastern hemisphere.
Heading into trading on Tuesday, all three of the ETFs noted above have earned “consider avoiding” ratings of less than 3 out of 10. These ratings apply to exchange-traded funds that have climbed to levels where sellers and short sellers historically have emerged to take prices lower.
When markets trading in bull market territory earn downgrades to “consider avoiding” status, it is often the signal for traders to begin thinking about taking profits. But when markets earn “consider avoiding” ratings when they are trading in bear market territory, becoming overbought below their 200-day moving averages, the sellers are typically short sellers, and their impact on the market can be swift.
Consider for example that the last time EWA rallied to these short-term overbought levels was back in late October, shortly before a three-day slide that took the fund lower by more than 7%. And a one-day drop of well over 1% in EWZ early November was anticipated by a one-day downgrade in the ETF from 3 out of 10 to 2 out of 10.
The ETFs in today’s report were drawn from the data and research available through PowerRatings. To find out more, click here.
David Penn is Editor in Chief of TradingMarkets.com