September 8, 2009

S&P 500 vs Emerging Markets

Much is made of global market performance in recent years. In the face of this performance, is something larger at play? The weekly bar chart above plots (from top to bottom) S&P 500, Emerging Markets, and Latin America ETFs. Blue vertical and horizontal lines market key time and price points on the chart. A series of Fibonacci retracement grids are drawn on each of the three charts - two for the SPY, and one each on the EEM and ILF. Points of divergence, where markets made different higher highs and lower lows from 2007 through 2009, are also noted.

Despite world markets rising in unison from March 2003 through October 2007, total return streams between the S&P 500 (98%) and Emerging Markets (404%) were not the same. The emerging markets, accepted as a greater risk investment, rewarded investors who wisely made that allocation. The Latin American markets were and even greater investment, yielding more than 800% in total returns from the same point in time - but the market did so continuing to make new highs in May 2008.

But what of downside risk? Measured from market peak to trough for each ETF, the SPY (-57%), EEM (-67%) and ILF (-68%) fell nearly in unison, with the overseas instruments loss limited to 1.2 times that of the domestic SPY index. Fast forward to their respective market bottoms, and we see that the SPY did not bottom until March 2009, whereas the EEM and ILF bottomed in late November 2008 - some four months earlier. Indeed, these overseas markets made higher lows over the same time period during which the SPY made a lower low going into March 2009. Money was flowing into these higher beta instruments in pursuit of investing alpha.

When will it end? Many technicians are currently drawing, as the first of two grids in the SPY above, their Fibonacci retracement levels from the peak in October 2007 to the bottom in March 2009. Doing so, the market is currently at a point of resistance with some positioning for a market reversal. As gold rises today, and the dollar falls, some feel the market advance may be nearing its end. An alternative view uses the peak of the Latin American markets in May 2008 to the respective troughs in each market as a point of reference. Doing so, the following long targets are offered:

• SPY - 115.14
• EEM - 39.29
• ILF - 45.17

Whether the markets continue to advance from, or falter at, these levels, technicians should look for and consider taking cues from overseas markets. The world is truly a global investment, and the US Domestic markets could in fact be benefitting from the rise in global markets. To wit, over comparable periods since the Emerging Market and Latin American ETF November 2008 bottoms to present, the SPY (40%) lags the EEM (104%) and ILF (107%) in total return.

Jeffery E. Lay, CMT
President
Talon Eight, LLC

Disclaimer: This post is intended solely to disseminate information, and is not, and shall not be construed to constitute financial, investment or other similar advice. All posted material should be independently verified for accuracy and current applicability. Readers of this post are referred to the Risk Disclosure for further information.

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