Emerging markets are often looked to as an indicator of risk appetite. If investors are buying those stocks, then it's assumed that they have a high tolerance for risk. Lately, those stocks have been doing very well, and for the first time in months, the MSCI Emerging Markets Index has moved more than 2% above its 200-day average.
When emerging markets finally managed to break this far away from its average, it typically kept going, though it was not a strong edge. Since 2010, every one of these signals showed a negative return either 2 or 3 months later. It was a better sign for the S&P 500.
Like we're seeing with domestic indexes, even though they're holding up, many stocks are not necessarily following along. In emerging markets, there are still fewer than 60% of stocks above their long-term averages.
Even so, the push late last week triggered many of them to move outside of their upper Bollinger Bands and also become overbought, with a Relative Strength Index above 70.
There are a couple of minor worries about emerging markets here, but the momentum is more of a good sign than an "overbought is bad" one. Ideally, for bulls, the move will become sustained enough that more than 60% of stocks can exceed and hold their 200-day averages and shift the environment to more of a healthy one. Based on preliminary signs, that should happen.
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We also looked at:
- What happens when emerging markets move more than 2% above the 200-day average
- What happens when there is a spike in emerging market stocks overbought or above Bollinger Bands, during "unhealthy" markets
- Emerging markets vs hedger positions in the U.S. dollar
- Emerging market fund flows and shares outstanding are very low
- The copper market is in backwardation for the first time in a year
- The S&P has seen a lot of days with big gains over the past 100 sessions
- A lot of Chinese stocks are overbought and poking above their volatility bands
- Same with stocks in Hong Kong
The post titled Emerging market stocks are trying to break away from an unhealthy market environment was originally published as on SentimenTrader.com on 2020-07-07.
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