Zak Mir Emerging Markets Special

One of the better so called “rules” as far as the financial markets is concerned, over and above such classics as “Sell in May” and “The January Effect”, is one of my own of which many will no doubt be familiar. That being – “Once you have spotted a pattern, it will be gone!”

Such a pattern may be that the stock market rallies on the first day of the month, or that Gold weakens when the U.S. Dollar rallies. But as long in the tooth traders will avow to, patterns you can bank on, and relationships between asset classes and events tend to be a moveable feast at best, and a money losing trap at worst.

I would go so far as to say that one of the better illustrations of such a trap on a macro scale in the recent past was the November/December decline in emerging markets indices ahead of what was widely regarded as a new QE Tapering regime. What we saw was the “smart” money rushing out of currencies and stocks in the likes of Brazil and India, as the relative attraction of parking your cash in these regions appeared to wane given the prospect of improved returns in the U.S.

While one can certainly see the logic in the exodus, to me, such a move on the part of investors was questionable for three main reasons. The first is that an “ultra-dove” was soon to take over at the end of January as Chair of the Federal Reserve that is likely to halt the tapering at some point in the next few months. The second is that investors have had months or even years to get accustomed to the end of near to zero interest rates and so it should be “in the price”. Arguably, my third reason is the most tenuous, although perhaps the most obvious – emerging markets are so called as they should have massive long term growth potential. Hence, being short on a 3-5 year view really does not make much sense.

If we switch over to what has actually happened since the autumn for key emerging benchmarks, the evidence of the trap since then for traders and investors is quite clear. Ironically, the market in which one might have expected the worst from as far as recovery or upside is concerned given the Putin push into the Crimea is the Russian stock market in the form of the Micex.

What we have here as we can see from the chart is a very sharp bear trap rebound within a broadening triangle formation on the daily chart from this time last year. The bounce last month was from well below the former spring 2013 1,270 support zone, with a massive overshoot below 1,200 at worst. The expectation now amidst a painful looking bear squeeze is that we shall see a retest of former late 2013 / early 2014 support at 1,420 plus. One would admit that those going short late last year did get lucky in terms of the geopolitical strife which ensued however, looking at the setup currently, it would appear that remaining short may not be a good idea. This is despite the noose that remains around the markets as far as international sanctions on Russia being tightened.

With the Brazilian market, in the shape of the Bovespa, we had minimal impact from the Putin / Sudetenland re-run effect. Here, the daily chart shows how investors were running from the South American economic wonder in good time ahead of the end of year tapering jitters, with the break of the summer’s sub 49,000 support to start this year paying testimony to this. However, the implication of the latest sharp recovery is that the double early 2014 bear trap reversal from below former 2013 support is the beginning of the end for the bears, unless the floor of a rising 2013 price channel / the 49,000 level is lost very quickly again. Really, it would appear to me that we are back in a 49,000 to 56,000 range unless something very surprising happens.

Finally, a look at one of the “heroes” among emerging market, which is perhaps fortunate enough not to be included / cursed by the so called BRIC acronym. While Turkey has certainly had its fair share of Arab Spring type issues in the recent past, it can be seen that the late 2013 probes below former 2013 support in September towards 64,000 were really the final bear traps associated with a selling climax for this market. The technical position now with the ISE 100 knocking at both former November support and the 200 day moving average is that a weekly close above these points could unleash quite a sharp rally within an overall rising May price channel from last year. The best case scenario at this stage would be to project this market as high as 84,000 at the 2013 resistance line projection on a 2-3 month timeframe.