Are EM Stocks About To Take Another Major Leg Down? by Eric Bush, CFA – Gavekal Capital Blog

Our GKCI Emerging Markets Index broke down to its lowest level since July 2009. The index is already off 25% from the 2015 high. Are emerging market stocks about to take another large step lower?

Market internals suggest that the most likely course of action for EM stocks is that they don’t break much further below current levels as the market is nearly as washed out as it was in September. At the very least, market internals suggest that a another major price decline would be a large increase in downward momentum from an already oversold market. Let’s take a look at a few market internals data points and compare them to the low made in August/September.

As of yesterday, 27% of EM stocks were making a new 52-week low in price. This number got to 31% during Septembers plunge.

 

EM Stocks

As of yesterday, 56% of EM stocks were at least 30% from its 200-day high. This internal data point actually peaked during the first wave of selling that occurred in August. On August 24th, 66% of of EM stocks were at least 30% from its 200-day high.

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As of yesterday, on 34% of EM stocks had outperformed the MSCI World Index over the past year. At major lows, this number usually bottoms out around 28-30%. It did reach 19%, however, in 2008. On August 26th, 27% of EM stocks had outperformed the MSCI World Index over the previous year.

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Correlations are again on the rise. The 20-day correlation between the GKCI EM index and the MSCI World has moved back up to 0.38, just below the 0.47 level hit in September. However, the 200-day correlation continues to move higher as it is now at a 3-year high at 29%. The 200-day correlation is approaching levels seen from 2008-2012.

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Finally, only 16% of EM stocks are trading above its 200-day moving average. This is above the 8% hit in August but still at very oversold level.

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