Wednesday, October 19, 2016

The Next Big Opportunity - Emerging Markets

US Markets rallied impressively today. More importantly, they maintained the gains that were achieved at the start of the session. Hallmark of a sustained rally is that it continues and does not fail.

While US stocks are coming out of a consolidation phase (detailed analysis), and have many catalysts that could propel them to higher levels, the next big move might come from the emerging markets.

Long-term Emerging Market structure
Emerging markets have been in a sideways mode since 2011. For the past 5 years, emerging market have consolidated while US markets were making new highs. Following chart shows the performance of EEM (emerging markets ETF) over last 13 years.

Since 2003, emerging markets have gone through 4 phases:

  1. Major rally (impulsive move) lasting for several years and culminating in 2007
  2. Major correction of 2008, which was caused by global financial crisis
  3. Sharp rally out of the financial crisis lows of 2009
  4. Correction from 2011 highs that has brought EEM down to levels not seen 2006
Interestingly, both corrections (2 and 4) have a corrective formation i.e. 3-wave structure and both rallies (1 and 3) are impulsive in nature Therefore, it means that the trend remains up. And if the recent correction has ended, we should expect a very sharp and long-lasting rally in the emerging markets.

Short-term Structure
From a shorter term perspective, emerging markets are consolidating in a sideways formation. Once this sideways action ends and the market breaks out to the upside, it will have a lot of momentum. In fact, it could lead emerging markets to reach 2011 highs in the next burst higher.

Emerging market components
Although the EEM components will be adjusted next month, currently Chinese stocks determine the performance of the emerging market ETF. If Chinese markets are break-out, the entire emerging market complex will follow suite.

Market Classification Model
We have developed MCM for emerging markets. We will share the latest finding with subscribers. However, the bottom line is that the trend is approaching a reversal in the emerging markets to the upside. Once the trend reverses, we should expect a long-lasting rally in the emerging markets index.

Persistent investment behavior is critical for longer-term capital gains because that's the best way of gaining preferred tax treatment, which can significantly help your portfolio.

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