The stock market is off to a good beginning in 2012. Within the setting of the market rally there have been some shifts in the relative performance of different areas of the market that have taken place since the start of the year. Utilities and consumer staples, which were strong last year, have been out of favor so far. The international sector was hit hard last year, but this formerly weak area of the stock market has been improving in relative strength on both a short and intermediate term basis.
One of our favorites is the iShares Emerging Markets Index ETF (EEM) which is one of the most popular ETFs for gaining exposure to the emerging market area. EEM holds stocks in ten of the world’s largest emerging markets, with its three biggest weightings being China (17%) Brazil (15%) and South Korea (15%) as of 12/31/11. It also holds stocks in Taiwan, South Africa, Russia, India, Mexico, Malaysia, and Indonesia. Top holdings and sector breakdown can be found on the iShares website http://bit.ly/yHtp5V
The chart below shows that after being weaker than the S&P 500 Index for much of 2011 a shift in strength has taken place, with EEM stronger than the S&P 500 Index for the past month. Moreover, EEM has crossed above its 200-day moving average, and has bested its high from last October. All of these developments are bullish, both for emerging markets in particular and for global stock markets generally.
Figure: iShares Emerging Markets Index ETF (EEM), daily (top half), and relative strength of EEM versus the S&P 500 SPDR (bottom half). Notice that EEM has crossed above its 200-day moving average for the first time since last July. The level of this moving average, $42.39, is now a support zone. EEM is now also higher than its October high point.The bottom half shows that emerging markets (EEM) were weaker than the S&P 500 (SPY) starting from August 1 through early January. However, that trend has reversed itself, as evidenced by the trendline break on January 13, 2012.
Another ETF that can be used for an international representation is the iShares MSCI EAFE Index ETF (EFA). The benchmark EAFE Index for this ETF represents mainly large-cap stocks from developed countries outside of North America. The top three countries in this ETF are United Kingdom 22.7% Japan 21.17% and France 8.7%. The top 3 sectors are 22.56% financials 12.7% industrials and 10.8% consumer services. More details about the top holdings as of 2/1/11 along with the sector breakdown can be found at: http://bit.ly/A9f8gm.
Figure: iShares MSCI EAFE Index ETF (EFA) weekly, and relative strength versus the S&P 500 SPDR.
Top clip: The price of EFA remains below its October 2011 peak, unlike emerging markets (EEM) or SPY.
Middle clip: The relative strength between EFA and SPY has been in a downtrend since October 2009.
Bottom clip: The MACD of the relative strength is far below zero, suggesting that EFA has the potential to recover some ground lost relative to the S&P 500.
This ETF has been under pressure and in a down trend since late April, 2011, losing 12.25% in 2011 including dividends. The relative strength chart pattern is long-term oversold on a weekly chart and is therefore in position for a meaningful rally to occur. (See chart above.) As with EEM, the short term down trend in relative strength compared to the S&P 500 was broken on a daily and intermediate term basis in January.
Investors wishing to invest in foreign markets can use a combination of the iShares Emerging Markets Index ETF (EEM) and the EAFE Index ETF (EFA). We have recently increased our foreign equity exposure for clients.
Bonnie Gortler, Head Portfolio Manager
Signalert Asset Management, LLC
Signalert Asset Management, LLC
phone: 516 829 6444 * email: bgortler@signalert.com
