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Saturday, February 19, 2011

Slowdown In Emerging Markets Started Before Egypt

The iShares MSCI Emerging Markets ETF (EEM) dropped 3.2% to $45.33 a share today on more than three times its 90-day average volume.

But as technical analysts are pointing out Friday, signs of weakness in emerging markets stocks began appearing before riots in Egypt brought troops into the streets of Cairo.

Since reaching a multi-year high in November, shares of EEM have struggled to rebound. On Friday, the ETF’s price closed near its intra-day low. In a sense, like a punch-drunk boxer, EEM was saved by the bell.

From a technical standpoint, EEM’s next level of support is around $44.78 a share, its low point at the end of November. Below that level, a fall to roughly $43 a share would leave EEM close to its 200-day moving average, a key line of defense that technicians monitor.

At the end of 2010, China represented about 17% of EEM’s assets, its largest single country. With belt tightening and possible interest rate hikes on the horizon, stocks in China could face more downward pressure.

The portfolio’s second-biggest country is Brazil at nearly 16%. It faces some rather severe inflationary pressures as well.

Throw in recent unrest in Indonesia, Tunisia and, now Egypt. It doesn’t paint a pretty picture right now for EEM investors.

At least one money manager I’ve followed over the years pulled the trigger today.

As he was working on his latest weekly newsletter for clients this afternoon, Jerry Slusiewicz, the president of Pacific Financial Planners in Laguna Hills, Calif., took a few minutes to explain why he’d shifted a small portion of his client assets into the ProShares UltraShort MSCI Emerging Markets ETF (EEV).

“There’s been rioting for a few days now in Egypt. The big question is whether unrest continues and if it’ll spread to more countries,” he said.

Slusiewicz noted that he’d moved out of EEM last week and early this morning shifted a small, partial position in his global portfolio into the leveraged ProShares ETF.

EEV closed up 6.3%, or $2.06, at $34.71 a share. Volume on the day was up 272% in the ETF. Slusiewicz set a stop/loss at $32.15, a nickle below Thursday’s close.

“There’s no reason to play around here — this trade is either going to work or it won’t,” he said. “It’s just a play on growing weakness in emerging markets over the past few months. But I’m bullish on their prospects over the longer-term.”

His price target on EEV is $37 a share, which was near where the ETF peaked in November.

“Hopefully, this (unrest in Egypt) will be over shortly. I’m not taking the mindset that the world’s about to catch on fire or anything. But technically, emerging markets look a little weak right now,” Slusiewicz said.

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