Frothy Risk On Market? Umm, Not Yet!

• Posted by Greg Harmon
• on August 8th, 2013

One measure of market strength is the ratio of the S&P 500 ($SPY) to Emerging Markets ($EEM). It is thought that if Emerging Markets are strong then the risk appetite is strong as well. So if money is flowing from the S&P 500 to Emerging Markets then there is an acceptance of risk . A flow from safer to riskier assets. This can be a sign of frothiness. So what does the ratio look like? Take a look below.

The ratio of the S&P 500 to Emerging Markets shows a transference all right. But not from safe to risky assets. The flow is the other way. In fact the technical picture looks like another move higher in the S&P 500 relative to Emerging Markets is about to happen. The ratio is breaking the Symmetrical Triangle that formed, consolidating the move higher from May, to the upside with a target of a ratio of 4.75. But there is also a Measured Move higher to 5.00, that could complete a 3 Drives Pattern. The Relative Strength Index (RSI) is moving back higher in bullish territory and the Moving Average Convergence Divergence indicator (MACD) has just crossed higher and is rising. All signs point higher. More upside for the S&P 500 relative to Emerging Markets. No froth.

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