Emerging Markets Leadership - Friday, February 11, 2011, 7:00am EST

Over the last couple of years, one of the most promoted and profitable areas of the market have been the Emerging Markets. And certainly a great case can be made for the investment opportunities in these young emerging economies. Investors have not only have tried to profit from direct investments in the emerging markets, but also investing in multinational corporations that have emerging markets exposure.

It now looks like this story might be coming to an end, and what helped propel the markets higher over the last couple of years, could now be the catalyst to propel them lower.

In our leverage to ETF portfolio, we are 90% long and only 10% short. And that 10% is with the Emerging Markets Bear ETF. Notice the Higher lows and higher highs since the start of the year. This is a bullish chart pattern for this ETF, but bearish for Emerging Markets.

Taking a look at a weekly chart of the BLDRS Emerging Markets 50 ADR, we can see that we are now breaking down through a trendline that started back in the summer of 2010.

Take a look at what the Indian market has been doing since the start of the year.

How would you feel if this was the S&P 500 or the TSX?    

Yeah but that's just India.  But we still have Brazil!!!

I wish we did. 

 

And then there is Hong Kong. 

and Chile

 

And now we see Taiwan starting to break down. 

For those of us who focus on the North American markets, this is all of course just background noise.

Or is it?

The divergence between our markets and the emerging markets could go unnoticed for longtime.

Unfortunately many market analysts have built-in continued and increasing profits from the emerging markets in to their forecasts of the major global multinationals that are the cornerstone of indexes like the Dow, NASDAQ and the S&P 500.

I think the charts are starting to tell us that these forecasts may be extremely optimistic.

Conclusion

It's time to avoid emerging markets, and be prepared for the North American markets to play catch up on the downside in the not so distant future. 

Stephen Whiteside

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