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It is generally accepted wisdom that global growth is driven by emerging markets, especially Brazil, Russia, India and China -- the BRIC countries. However, the exchange-traded funds (ETFs) tied to these country markets have been underperforming the U.S. market for nearly three months.
While still only a short-term phenomenon, investors should be aware of the possibility that there is more weakness ahead.
Starting with Brazil, the iShares MSCI Brazil Index Fund (ticker: EWZ) has been lagging behind the Standard & Poor's 500 since early October (see Chart 1). Some chart watchers might even label that month's action as a "double top," a pattern that often marks at least a temporary top in a rally.
Chart 1
Chart 1: ISHARES Brazil ETF
Shaped like a capital letter "M", it shows a failure to set a new high followed by the breakdown below the previous low. Basically, the rising trend is broken and the market stalls, if not falls.
Given supporting technical indicators such as momentum and volume, I am not so sure we'll see much lower prices at this time. But at a minimum, the bulls are now struggling as the ETF trades below its key 50-day moving average.
Skipping to India, the chart is even weaker. The iPath MSCI India Total Return Index ETN (INP) is currently trading down nearly 12% from its Nov. 5 peak (see Chart 2).
Chart 2
Chart 2: IPATH IIndia ETf
Granted, the rally that preceded the decline was equally as large, but it seems to be more than a relatively volatile market returning to the mean. It was also the worst bout of underperformance versus the S&P 500 since the financial crisis was in full throttle in late 2008.
There is strong support in the 69-70 zone so the bears cannot claim a long-term victory. For now, it seems as if the market is floundering and without any technical foreshadowing of better things to come in the near future.
Representing China, the iShares Trust FTSE/Xinhua China 25 Index Fund (FXI) has also had a steep decline since early November (see Chart 3).
Chart 3
Chart 3: ISHARES FTSE/XINHUA China 25 ETF
Over the past six weeks, the ETF lost more than 10%, erasing the relative advantage it had over the S&P 500 for the entire year. In other words, investors were no better off buying the China ETF than they were sticking with domestic stocks.
Unlike the Indian ETF, this one also dropped back into the 2010 trading range from which it emerged in October. Chart watchers call this a breakout failure, and as its name sounds it is not a good thing.
Finally, the Market Vectors Russia ETF Trust SBI (RSX) is doing well in contrast to its other BRIC mates. It is currently trading at two-year highs and is slightly stronger than the S&P 500 (see Chart 4).
Chart 4
Chart 4: Market Vectors Russia ETF
I'll leave it to others to ponder why this might be, although strength in some of its key export commodities such as wheat and oil may be a factor. Technically, the trend is up, although we can make the argument that it is in need of a correction, possibly to its rising trendline near 35.
Chart 5
Chart 5: ISHARES Spain ETF
Before closing, I would like to take a look at one European market in the news today -- Spain. Moody's Investor Services (MCO) warned that it may downgrade the country's debt and the stock market there responded with a 1.5% decline Wednesday. The iShares MSCI Spain Index Fund (EWP) fared a bit worse and is now on the verge of ending its December bounce (see Chart 5). The chart looks very weak, indeed.
Whether weakness in popular markets such as Brazil, India and China, and endangered markets such as Spain, will translate into problems for the U.S. remains to be seen. But as the year 2010 draws to a close, stocks are holding up fairly well on both a relative and absolute basis.
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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