Monday, August 17, 2009

Relative Weakness Among Emerging Markets: Weak Link in the Bull's Armor

I just want to amplify an excellent blog comment from reader Matthew C. Above we see a daily chart of the S&P 500 Index (SPY; top chart) vs. its 20-day volume-weighted moving average. Note that we've broken below that average today, but remain well above the June highs. That keeps the uptrend intact.

China's market (FXI; bottom chart), however, has been below its 20-day average for several days and today has moved back into its June range. Nor is China unique in this respect. We also see Brazil (EWZ); Russia (RSX); Hong Kong (EWH); and India (EPI) moving back into their June trading ranges.

Why is that potentially significant?

The growth story among the emerging markets, particularly in China, has been a major driver of the recent stock market rally. If those markets are getting ahead of themselves--and especially if we see China pulling back on stimulus--that would raise questions about global demand for the goods of developed nations, as well as the demand for commodities.

This is a theme worth keeping an eye on.