June 12, 2018
Bears seem to be roaming wherever you look, whether it be in the US equity market, the gold market, and especially in the emerging markets as of recently. Whether I read articles, or the comments to those articles, it seems there is a common expectation that “emerging market dominoes are falling” and it will “cause deleveraging and contagion” across portfolios worldwide.
It certainly sounds like a dire situation is developing in the world today. Does it not?
Now, where have I heard this story before? Oh, yes. Back in early 2016, the common belief was the same as it seems to be now.
Yet, as we began 2016, I noted the following in my weekend update to subscribers of my analysis:
“Lastly, as I have been mentioning several times, I see the potential for 2016 being the year that major commodities, many emerging markets, and the U.S. equity market all bottom, and we begin a global melt up. So, stay tuned, as 2016-2018 will likely be a very interesting time.”
So, why was most of the market so bearish in early 2016, whereas I saw something so extremely different?
Most market participants and analysts alike see price heading in a specific direction and assume that it will continue in that direction indefinitely. While often there are times they would be correct for maintaining such an expectation, such as the stock market rally from 2016-2018, which we foresaw before it occurred, many of these prognostications do not have the benefit of understanding the larger perspective of where markets reside within their respective cycles. Understanding how markets progress and regress in the larger scale of their respective cycles can assist the average investor in maintaining on the correct side of the market the great majority of the time.
When our analysis of market sentiment (based upon Elliott Wave structures) couple with supporting technical readings, it usually provides us with a high probability perspective. And, that perspective aligns currently in the emerging markets, US equities and gold in the same way it did back in early 2016.
Admittedly, I do not see the same upside potential gains in the US Equity market and emerging markets as I did back in 2016, I still see the same bottoming set up as we experienced in early 2016. While we saw the potential for a multi-year rally beginning in early 2016 for equity and emerging markets, I think this rally will only present us with 6-12 months of rally potential.
For this reason, I see an opportunity in the iShares MSCI Emerging Markets ETF ( EEM), which seeks to track the investment results of the MSCI Emerging Markets Index. I think this fund presents us with a good vehicle to take advantage of the opportunity I am expecting in the emerging markets.
When it comes to the EEM, as long as the market holds over the 43 region, I am looking for a minimum upside target of 55, with a more ideal target at 60. In other words, as long as 43 holds as support, the sentiment pattern is pointing much higher rather than pointing to the implosion that many seem to be quite certain is taking hold. So, I would simply recognize the extreme negative sentiment as pointing to a bottoming in the complex.
Yet, since we can never know, with certainty, what the market will do, as we only base our analysis upon probabilities, we use these support levels within our risk management plans, and I suggest you do the same.