Time for the giant US to take on the Emerging Markets

• Posted by Greg Harmon
• on March 13th, 2015

The US market has had a great 6 year run higher. Many prognosticators and professional talkers are taking this anniversary as a time to ‘take some off the table’. Do you remember growing up when your mother put a pizza on the table for dinner. You took a piece, then your brother and sister, then you took another. Your siblings followed. Soon there was nothing left on the table. Do you know what would happen to your portfolio if you took some of the table every time you were told to do so by a professional?

If you are scared that the market has topped there are many ways can protect your portfolio without moving it to cash under your mattress. One way is to hedge by selling something else. The chart below shows the ratio of the S&P 500 ETF ($SPY) to the Emerging Markets ETF ($EEM). Many look at this ratio as a measure of risk taking in the global markets. Movements in favor of Emerging Markets are seen as an increase in risk taking. So buying this ratio can be viewed as moving away from risk.

And this chart from a technical perspective looks ready to break out to the upside. A move over a ratio of 5.37 breaks an ascending triangle and gives an upside target of 5.76 on a conservative measure, and 6.18 on the wider triangle. The momentum indicators support a break out as well with both in the bullish ranges and rising. The Bollinger Bands® are shown as well because they are opening to the upside to allow the ratio room higher.

A move to 5.76 or 6.18 in this ratio would be great. Returns of 7.25% and 15% are nothing to scoff at. But the monthly chart above shows there may be even more potential. The rounding bottom that has been playing out has upside to a ratio of 8.00. Now that is a happy though. Maybe that is why it looks like it is smiling at you.

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