Emerging markets may need to break one level for rally to have legs

An underperforming corner of the market has shown signs of strength over the past month.

Emerging markets are lower Tuesday but scoring larger gains than the S&P 500 so far this quarter. The EEM emerging markets ETF has added nearly 6% since the beginning of October, while the S&P 500 has gained 4%.

Ari Wald, head of technical analysis at Oppenheimer, says this breakout is just beginning.

“It puts us firmly in the ‘buy the dip, this is an opportunity’ camp here. [It’s] a very bullish setup for emerging markets. They’re basing and I think positioned to reverse higher,” Wald said on CNBC’s “Trading Nation” on Monday.

Wald adds that this breakout is years in the making.

“I want to call out the strength we saw a couple years ago in 2017. That reversed a 10-year downturn in EM dating back to its 2007 peak. Now EM went on to peak in January of 2018 and really had a classic yearlong bear market into its December 2018 low. It’s now spent 2019 building the base. It’s been backing and filling — starting to make higher lows, the moving averages are starting to slope higher. And we think the next turn is to the upside,” he said.

However, the EEM ETF does need to break out above one key level for this rally to lead to higher highs, according to Wald.

“We need to see a rally above the April peak at $45 to confirm the completion of the base. I think that sets the stage for a move back to prior peak levels at around $50. In the meantime, it’s important to hold $42 support if our bullish outlook is going to play out,” said Wald.

The EEM ETF is a 4% move away from reaching $45. It needs to rally 16% to touch $50.

John Petrides, portfolio manager at Tocqueville Asset Management, says investment in the emerging markets comes with risk.

“You have to consider two things: What’s your investment time horizon and what’s your risk profile? And if you can stomach volatility that comes along with investing in emerging markets, I think for the valuation and fundamental story, investing in the asset class is quite attractive,” Petrides said during the same segment.

From a January trough to the year’s highs in April, the EEM ETF surged more than 17%. While it has had a volatile stretch through the middle of the year, it remains just 4% below that peak.

Disclaimer