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LAST MONTH, I WROTE HERE THAT weakness in the BRIC markets -- Brazil, Russia, India and China -- was a harbinger of bad things to come elsewhere. (See Getting Technical, "Falling BRICs Can Shake Other Emerging Markets," Jan. 27. 2010.)
Indeed, after the column ran, the iShares MSCI Emerging Markets Index Fund (EEM) fell by as much as 7% to its Feb. 5 intraday low before rebounding. Compare that to the Standard & Poor's 500 and its 4.5% loss over the same period of time.
While I do believe that over the long term, emerging markets should have a comfortable home in any investor's portfolio, for the near term these markets are in the hot seat.
On the surface, it seems strange that the technical underpinnings of the world's growth engines -- BRICs and other emerging markets -- are similar to those of the world's problem markets, affectionately known as PIIGS. It makes sense that stock markets in Portugal, Ireland, Italy, Greece and Spain face weakness as these countries face severe economic challenges.
Kevin Daly, an emerging-markets portfolio manager with Aberdeen Asset Management, says that emerging markets are not battling domestic economic problems with multibillion dollar government spending. "Unlike their brethren in the developed world," he adds, "emerging-markets banks are not saddled with toxic debt."
So why are the stock markets there showing such weakness?
I believe the answer is that investors are starting to avoid riskier assets in earnest. Emerging markets still carry added risk. At a minimum, they are less diverse economies with smaller cushions to withstand global economic hiccups. But I will leave further discussion of this risk to more fundamentally oriented analysts.
Tuesday, the Dow Jones Industrial Average shed 101 points on the heels of a huge drop in consumer confidence. On the charts, the selling was taken in stride and the rising trend from the Feb. 5 low remains intact. However, the iShares MSCI Brazil (Free) Index Fund (EWZ) has a different look (see Chart 1).
Chart 1
The trend here was indeed broken to the downside on respectable volume. And when we look at the bigger picture, this exchange-traded fund has been lagging the Dow since December. That is quite a revelation for a market that is supposed to be one of the world's powerhouses.
The Turkish market offers additional proof of how investors are moving away from risk. This week, the market sold off on news of coup allegations and arrests, but it had already changed gears a few weeks before. The iShares MSCI Turkey Investable Market Index Fund (TUR) reached fresh rally highs in January with the Dow, but its fall in early February was a shocking 14% (see Chart 2).
Chart 2
The action resulted in a clear technical breakdown. But as most markets around the globe clawed they way back, albeit not from such dramatically overextended conditions, Turkey got a bit of good news. On Feb. 19, Standard & Poor's raised its long-term foreign currency and local currency sovereign credit ratings to BB and BB+, respectively.
Although such ratings are still below investment grade, this should have been positive for its markets. However, on the next trading day the ETF began to fall. And then news of the military action sent it into a freefall.
While Turkish trading is indeed under nonmarket influences at the moment, the fact that it had a technical breakdown several weeks ago, and then rejected positive news, keeps it off the menu of risk-averse investors.
Again, I do concur with Aberdeen's Daly that emerging markets are the places to be over the long term. However, it appears that patient investors will be able to buy them at cheaper prices in the near future.
Getting Technical Mailbag: Send your questions on technical analysis to us at online.editors@barrons.com. We'll cover as many as we can, but please remember that we cannot give investment advice.
Michael Kahn, mutual fund co-manager, author of three books on technical analysis, former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, also blogs at www.quicktakespro.com/blog.
Comments? E-mail us at online.editors@barrons.com
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