Tuesday, September 15, 2009

Emerging and U.S. Stock Markets: A Look at Relative Performance

One way I look at risk appetite in the equity markets is to track the performance of emerging market countries (EEM, top chart) and the relative performance of emerging markets to the U.S. (EEM:SPY, bottom chart).

We can see from the top chart that EEM has made fresh bull market highs recently along with the major U.S. indexes.

We can also see, however, that relative strength between EEM and SPY has been in a range since late May.

Note how EEM began outperforming SPY prior to the U.S. stock market bottom in March and clearly outperformed through May. Since that time, we've seen pullbacks in Russia and China that have weighed on the performance of EEM.

I would take a relative strength breakout to the upside as a positive signal of risk appetite among stock traders and investors. Conversely, a relative strength breakdown to multi-month lows could suggest fresh risk aversion. It might also reflect a reassessment of value, given the lofty performance of emerging markets and heightened profit expectations in the U.S. from companies benefiting from a weaker dollar.