An Object In Motion

Emerging Markets have been a serial disappointment. Over the past five years they’ve been a money loser and were a huge opportunity cost relative to U.S. stocks. But alas, there is at least a glimmer of hope that things might be changing.

eem spy

Emerging Markets (EEM) have spent the last 184 days below the 200-day moving average. In that 184 day period, EEM experienced a decline of 29%.

Below are two charts; the top one shows how many consecutive days EEM has spent below the 200-day. More interesting is the chart below it, which shows the percent change when these stocks were above or below their long term moving average.

em 200

Here are a few interesting nuggets:

  • The average daily change when EM stocks were above the 200-day was 0.14%, when below, the average daily change was -0.12%.
  • Using a minimum of 50 consecutive days above the moving average; the maximum average and median gain was 41% and 29%, respectively.
  • Likewise, using a minimum of 50 consecutive days below the moving average, the average and median max drawdown was -27% and -21%, respective

More important than whether or not stocks are above the long-term average is the slope of the average itself. In order to smooth it out, I’m going to use the ten-month moving average; using a +/- 1% slope to define an uptrend and downtrend. Here are the numbers:

  • When the ten-month average was in a down trend, the average monthly return was -1.5% and positive returns were seen just 36% of the time.
  • When the ten-month average was in an uptrend, the average monthly return was 2.4% and positive returns were seen 69% of the time.

It’s too early to say that Emerging Markets are about to enter a secular bull market, even though the 24% move off the bottom is certainly a relief. The ten-month moving average is still in a steep decline, so to see it flatten out a bit would definitely be a positive development.

If this type of analysis strikes you as voodoo, you’re doing yourself a pretty big disservice. I think technical analysis gets a bad name because of some of the ridiculous nomenclature, like the “3 peaks and a domed house pattern” or the “head and shoulders pattern.” But simply measuring the supply and demand of market participants strikes me as pretty common sense stuff. Technical analysis works for some people, but not for most people; just like every other form of security analysis.