Schaeffer's Trading Floor Blog

Was Wall Street Wrong About Emerging Markets?

The EEM has muscled higher in recent sessions

by 3/28/2014 7:17 AM
Stocks quoted in this article:

The market sure remains one big churn. Every rally peters out by late morning, and every breakdown that's supposed to emanate from the failed rallies manages to disappoint. But hey, here's an area that has quietly done well in recent days: emerging market stocks!

Remember them? They're the group that led us into a mild panic back in late January. Now they're not exactly booming, but they sit in a mild uptrend. Here's the iShares MSCI Emerging Markets Index (ETF) (NYSEARCA:EEM) price action and volatility over the last three months:

EEM Schaeffer's Volatility Index

EEM has now rallied for six straight sessions, for a pop of 4.3%. That's not gigantic, but it's pretty notable vs. the SPDR S&P 500 ETF (SPY), which has dipped about 0.1% over the same stretch.

EEM started 2014 with a nearly 10% drop that bottomed on Feb. 3, but has recovered to be down "only" 3.3% in 2014. Its 10-day realized volatility peaked at about 28 then, but it's now dropped to a relatively normal level of near 16. Implied volatility has also normalized to the high teens, as you can see above.

The put/call numbers have also seen a big drop off the highs. Here's the ETF's Schaeffer's put/call open interest ratio (SOIR), which measures options expiring within three months:

EEM SOIR

Hindsight is 20/20, but with the benefit of looking back, we can see pretty clearly that sentiment simply got too bearish in the emerging markets group.

It does highlight a couple of things, though. One is that despite what you hear on Twitter and StockTwits and on the TV, options sentiment indicators still work well as contra-tells at times. In indices, the crowds often get bearish at the exact worst times, as evidenced here. And it's not just options, of course -- short interest in EEM keeps trending higher, even now. Next time someone tells you about some big put purchase somewhere, remember that.

Also, wasn't this sector supposed to lead our markets lower? We ostensibly got very ugly a couple of months ago, due to slower economic growth in emerging economies. Well, the stocks are doing better, so maybe those economies aren't slowing down anymore? Or maybe there was more to the sell-off than just one data point? Last I checked, our markets aren't doing so great.

It's a good sign on the margins that a sector like emerging markets looks a bit better, but there's clearly more to our sluggishness than this.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


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