Currently many established emerging markets (EEM, EWZ, RSX) have been trading near four-year lows, thereby causing them to exhibit classic fundamental signs of undervaluation. They also have experienced sharp currency declines, making their local wages much lower when measured in U.S. dollar terms. This last happened in the first quarter of 2009 and greatly improved the profit margins for such companies which helped to create dramatic percentage rebounds in their share prices by January 2010.
Also of importance is the recent intraday price action for EEM and EWZ which is exhibiting bullish behavior. When an ETF experiences a strong recovery from any intraday bottom, it is an indication that a group of traders are bargain hunting. Conversely, the most bearish activity is a sharp pullback from an intraday high, signaling that some traders saw the elevated prices as an opportunity to reduce their position.
Momentum players will start buying commodity and emerging market ETFs soon, as well known moving-average levels are crossed. Once prices increase to a critical level, then trend followers jump aboard. When these rallies become much more advanced, then most amateurs and institutions start participating. Eventually, the media will create a great story as to why it is logical that commodity shares and emerging-market equities will continue to rally indefinitely. We all know that is the time to leave the party graciously.
At the end of the day it is difficult psychologically for investors to do the opposite of the masses. Yet, such an action often puts the odds in your favor.