Nearly all market fluctuations are driven by emotions, not by fundamentals. Therefore one key to long-term success is acting consistently in the reverse direction of the most psychologically extended market moves.
In recent days, some emerging-market indices and funds have fell to their lowest points since the summer of 2009. As a result, we are experiencing growing divergences and probable confusion among investors. In addition, emerging markets have experienced sharp currency declines, making their local wages much lower when measured in U.S. dollar terms. A similar situation happened in the first quarter of 2009, which greatly improved the profit margins for such markets. This facilitated dramatic percentage rebounds in their indexes by January 2010.
In general, timing for emerging markets (EEM) doesn’t always correlate with commodity producers. They often lag by several weeks and sometimes months in both directions. EEM is lagging at the moment because of the media attention to India. Before India became the center news, it was all about China (FXI). When the Emerging markets do start catching up, they tend to have violent runs up, making them impossible to buy at favorable prices.
EWZ, a fund of Brazilian shares, has a long proven track record of outperformance whenever emerging markets are rallying. It is the top performer of all exchange-traded, open-end and closed-end funds over the past ten years out of more than seventeen thousand funds.
With mining shares having been choppily rebounding from multi-year lows throughout the past two months, it is likely that emerging markets, especially EWZ, which correlate with commodity production, will soon follow them by establishing substantial uptrends. During a bull market in the emerging market EEM, or any other sector, it is common to get periodic shakeouts which essentially accomplish the task of knocking out technical short term traders who use sell stops. After their stops have been triggered, there is no further reason for the price to continue to retreat. Once there are no significant remaining sell orders the price quickly recovers.
A stronger rally phase is closely approaching for emerging markets, specifically EEM. Many traders become more frustrated with higher lows or double bottoms than they do with an initial steep decline because they become progressively convinced that a real rebound is becoming more and more hopeless. The rallies for most mining shares during the past two months are a significantly positive omen for all emerging-market equities, whether they belong to commodity-producing countries like Brazil (EWZ) and Russia (RSX) or commodity-consuming countries like India (PNI) and China (FXI).
A recent article from MarketWatch website discusses an upcoming bull market trend for commodities: Commodity prices are about to explode, Aug. 21, 2013. However, do note that the writer is recommending selling TLT which in our opinion is not wise. We are preparing to buy as long dated treasure bond prices begin to look favorable.