Funds Are Ready to Flow from Emerging Markets into US Equities

• Posted by Greg Harmon
• on December 14th, 2011

The markets go through periods where correlations hold and other periods where they do not. One pair to illustrate this is the S&P 500 SPDRs ($SPY) and the MSCI iShares Emerging Markets ETF ($EEM). From the ratio chart below you can see a period from February through August where it traded in a tightening range before breaking higher in September. It then consolidated from mid September through to now. But look what is happening now. It poked its had through resistance at

3.30 today only to fall back. But the Relative Strength Index (RSI) shows a trend higher and has been bullish, holding over 40 off of the pullback from near 90 , for over 3 months. the Moving Average Convergence Divergence (MACD) indicator has also crossed positive. Both of these support further upside above the breakout level. The Bollinger bands expanding higher also re-enforce an upside bias. It may continue to consolidate at the 3.30 level for a while before moving as it is outside of the Bollinger bands now. A break higher has a target of 3.55 on a Measured move. Looking at it from another perspective, the Andrew’s Pitchfork shows that it has been moving higher off of the Median Line toward the Upper Median Line. From this perspective it is caught

in the middle of the two Median Lines with 3.20 as support and a large move to the Upper Median Line to draw it higher if it can get above today’s high. Bullish either way but less determinant that the traditional analysis. Finally looking at it from a Point and Figure or tick chart, it has broken a Triple top at 328 with a bullish Price Objective (PO) of 3.88. All of these views show further

upside for this ratio, meaning a flow of funds from Emerging Markets into the US Market. This is, of course, relatively bullish for the US Equity Markets. But it might also be an indication that the perception of the strength world economy outside of developed nations is fading. Or perhaps just that the US is a safe place to harbor funds at the moment. What do you think?

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