Chart of the Week - Emerging Breakout

an Obscure Breakout from a Brobdingnagian Base...

You will be forgiven for missing this one, it’s gone completely under the radar of most market observers — and I didn’t even see it sitting right under my nose until last week (albeit the chart was hiding in an excel tab that I rarely revisit!).

What the chart is showing is Emerging Market Equities (excluding China)* breaking out from a Brobdingnagian Base 16-years in the making.

This is a rare setup that involves a long and often frustrating trading range with multiple attempts on a clear resistance zone.

Part of what makes it powerful is typically throughout that period while price has pretty much gone nowhere, the fundamentals (earnings) have trended higher, so you have a valuation effect (price gets left behind by the fundamentals).

The other (related) aspect is the psychology around it, when you have a market going sideways for so long people tend to write it off — it’s “dead money“ for investors, and just a range-trade for swing traders to hunt in.

So when you do finally see a breakout it’s mind-melting for markets.

At first it will be greeted with doubt and skepticism, then a slow shift to reluctant and cautious optimism, and then the crowd finally gets on board and the chase is on. These breakouts can thus see powerful upside when they get going in earnest.

Key point:  EM Equities ex-China are undergoing a major upside breakout.

*n.b. the index in the chart above was constructed (by me) using LSEG datastream country indexes, is price-only, equal-weighted across emerging market countries and presented in US$ terms.

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BONUS CHART: in case you were wondering, here’s what the chart above looks like overlayed against the classic MSCI Emerging Markets Index.

Basically the traditional EM Equity index appears to be playing catch-up — and making its own upside breakout.

Indeed, as I mentioned in the latest Weekly Macro Themes report, my belief is China is increasingly likely to undertake larger stimulus (aimed more at the consumer this time vs past focus on infrastructure and real estate). This will be very supportive for Chinese stocks, and by extension will likely power-up flows into emerging market equity products (China is a heavy weight in the EM indexes) and reinforce the breakout in EM ex-China via sentiment and flows effects (not to mention the macro). So overall the outlook for emerging market equities is looking more promising now than it has in years.

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Topics covered in our latest Weekly Insights Report

Aside from the charts above, we looked at several other important charts and interesting global macro & asset allocation issues on our radar:

• Rotation Stations: looking at a prospective rotation trade in action

• EM Equities: improving technicals, bullish cyclical indicators

• China: looking at EM ex-China, China, and stimulus scenarios

• Japan: structural changes lead to higher valuation potential

• Defensive Equities: a rare contrarian opportunity in the works

• US Dollar Pairs: sentiment/value/positioning across the majors

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Thanks for your interest. Feedback and thoughts welcome.

Sincerely,
Callum Thomas
Head of Research and Founder at Topdown Charts

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