Last week was the worst week for emerging market stocks since the start of the pandemic. What will happen next for emerging markets? Let’s see what the charts can tell us.
Check out the chart of the iShares MSCI Emerging Markets Index, symbol EEM. This ETF has broken its trend line, in black, and its 50 day moving average, in blue. EEM is holding on to a support level from July, represented by the purple line.
If that line breaks, EEM could shoot through the July gap to its next level of support, the 200 day moving average, in red. The current downward momentum favors such a move.
Why are emerging markets weak? According to Deutsche Bank, the U.S. election, just over a month away, is causing investors to move away from risk assets. This election will be like no other in U.S. history. It’s unknown when a winner will be declared, or if the results will be contested.
Risk aversion is evident in the chart of the U.S. Dollar Index, which is breaking out. The U.S. dollar is considered a safe haven, and money flows into it when traders are concerned with risk.
The bottom line: markets hate uncertainty, and although there’s no such thing as a “certain” market, we’re in uncharted territory right now. Now that the charts are breaking down, expect emerging markets to continue to underperform their developed counterparts.
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Ed Ponsi is the managing director of Barchetta Capital Management, and is the author of three books for publisher Wiley Finance. A dynamic public speaker, Ed has made appearances around the world, in such diverse locations as Singapore, Dubai, London, and New York. For more information about Ed and his work, click here.