A Chart Depiction Of The Washout In EM Stocks: They Will Be Interesting Soon, But Not There Yet by Bryce Coward, Gavekal Capital

With the MSCI Emerging Markets Index down about 17% from its high at the end of April we thought we’d provide a visual depiction of the selloff so readers can glean a better understanding of the action underneath the surface of the markets. Oftentimes due to market cap weighting distortions we see a wide divergence between how the average stock is behaving and how the overall index is behaving. This is one of those times and in some cases the divergence has almost grown wide enough to make EM stocks look decent from a tactical perspective should the long-term support level at the 2011 low hold. Ideally though, we’d like to see just a bit broader washout that is consistent with the lows seen in 2011 and 2013. With no further adieu, here is a quick and dirty summary of the underworkings of the broad EM stock market.The MSCI EM Index is quickly approaching the low achieved in late-2011. This is a critical support level that must hold for EM stocks to avoid a potentially much deeper decline. That said, EM stocks could look pretty interesting if the low holds.EM StocksThe percent of stocks above their own 200-day moving average is approaching what we’d consider to be an oversold level, but is not quite at the lows seen in the 2011 selloff or during the “taper tantrum”.

Pic5 EM Stocks

Our blunt momentum indicator that measures the percent of stocks whose 50-day moving average is above their 200-day moving average has turned lower, but again would need to take another leg down for this to become a really interesting oversold low.

Pic6 EM Stocks

While the broad EM stock index is only down about 17%, the average stock is down 26%. That’s a level nearly consistent with the “taper tantrum”.

Pic3 EM Stocks

Looked at from a slightly different angle, we count 62% of stocks in a bear market relative to their 200-day high.

Pic1 EM Stocks

From a more granular perspective still, we see that 35% of EM stocks are down by more than 30% and 27% of stocks are down between 20-30%. Only 16% of stocks remain within 10% of their 200-day high. That’s a low level, but not as low as we saw in either 2011 or 2013.

Pic2 EM Stocks

New 200-day lows have staged a bit of a surge, but not yet to the degree consistent with the 2011 or 2013 lows.

Pic4 EM Stocks

Same goes for realized volatility of the average stock, which has increased, but not yet to the levels seen at the nadir of prior selloffs.

Pic7 EM Stocks

This indicator, on the other hand, which is our version of the advance/decline line with the difference being that we calculate it over the trailing 3-years rather than since the inception of the index, has plunged to a new low. This tells us that a lot more stocks are declining than advancing over a sustained period. We like to see some sort of basing pattern in this indicator to indicate a low has been achieved.

Pic8 EM Stocks