Emerging Markets Look Overdue For A Correction (EEM)

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November 18, 2017 7:18am NYSE:EEM

From JR Crooks: Worries spread this week because U.S. averages were down two whole days in a row.

The bears are itching to yell fire. Again. And again.

I don’t blame them.

We could be on the precipice of a major market correction. I’ll show you an updated chart of the S&P 500 to reveal why.

But first, I have a few other charts to unveil …

Starting with crude oil, a Yahoo! Finance alert I received earlier this week noted that the recent stock-price pressure might have had something to do with the pressure on crude oil prices.

Eh, maybe.

Risk aversion begets risk aversion in a self-fulfilling prophecy sort of way. But I’m not sure a correction in the crude oil price is to blame. It just so happens oil is due for its own correction at the same time as stocks.

Oil could still bounce to $59, but I’d look for it to fall to $50 per barrel or lower by year-end.

Moving on to gold, my outlook is for lower prices. The whiff of risk aversion this week has supported gold prices. But supportive is about all it’s been — because upside momentum is absent.

When I say I’m “cautiously bearish,” that means I’m looking for a drop to between $1,250 and $1,210 per ounce before gold really catches a bid.

The yellow metal’s safe-haven appeal might dull in the face of a rethink about real interest rates. Real rates might not be able to rise a whole lot because central banks (namely the Fed) will be unable to withdraw their support. (Regardless of whether their support is perceived or real.)

This, of course, has bearing on U.S. Treasuries …

Safe-haven buying can support Treasury prices just the same as gold. But I think yields will be driven first by improving inflation and growth expectations.

I’m looking for lower prices (higher Treasury-bond yields) until, say, the time of the next FOMC rate announcement. So, mid-December is when Federal Reserve interest rate expectations might change and put the kibosh on rising yields.

Naturally, the value of the U.S. dollar falls right into this same narrative: Rising yields should continue to support the U.S. dollar in the coming weeks.

But if the differential on U.S. yields narrows relative to, say, European yields, the dollar will lose out.

Look for a continuation of dollar strength till about mid-December. Then maybe it’s time to become bearish again on the expectation that the Federal Reserve will respond to economic and stock market developments more dovishly than expected.

Speaking of stock markets, I still contend that U.S. dollar strength will pressure emerging-market sentiment and prices. It just might require global risk aversion to trigger the move. Here is a chart of the iShares MSCI Emerging Markets Index ETF (EEM) — which looks due for a sizable correction.

Again, such a move might only be triggered by a similar (though perhaps smaller) correction in the U.S. stock market. And while many fundamental bullet points underpin current market strength, longer-term patterns and indicators I use suggest a big correction will begin any day now.

If my analysis is right about the timing and the magnitude, we could see the S&P 500 drop between 15% and 30% in the next couple quarters. There will be volatility along the way, but that shouldn’t be surprising. That’s because low volatility has been a consistent characteristic of the bull market’s recent thrust.

My views on key asset classes seem to conveniently fit my overarching narrative.

And for many asset prices, the FOMC announcement on Dec. 13 may be a critical inflection point. For stock markets, however, that may just be another crazy day amid what could become quite a circus.

The iShares MSCI Emerging Markets Indx ETF (EEM) closed at $46.82 on Friday, up $0.23 (+0.49%). Year-to-date, EEM has gained 34.35%, versus a 16.42% rise in the benchmark S&P 500 index during the same period.

EEM currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #3 of 84 ETFs in the Emerging Markets Equities ETFs category.

This article is brought to you courtesy of The Edelson Institute.

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