More Downside Could Be In Store for This Emerging Markets ETF

There's plenty of optimism priced into underperforming EEM

Jun 19, 2018 at 10:20 AM
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The iShares MSCI Emerging Markets ETF (EEM) has been struggling on the charts in recent months. The fund has been locked in a channel of lower highs and lower lows since March, and this tidy downtrend shows no signs of slowing. Former support at the 200-day moving average has transformed into resistance in recent weeks, and earlier this month, EEM was rejected by its year-to-date breakeven point at $47.12. With EEM now trading well below $46.87 -- the area marking a 10% correction from its first-quarter closing high -- the emerging markets tracker looks set for more downside as bullish sentiment toward the sector unwinds.

eem daily chart june 15


And optimism was running quite high toward emerging markets at the start of the year, with noted investor Jeremy Grantham one of the sector's most outspoken advocates. In January, he told investors to "own... as much emerging-market equity as your career or business risk can tolerate," and his investment firm in April backed that bullish view in its seven-year market outlook.

However, as noted, the performance in EEM this year isn't living up to the hype. In fact, with the U.S. Fed on a policy-tightening path, many emerging markets currencies are facing fresh pressures. And with other sectors (like U.S. small-caps) outperforming in a big way, EEM could register heavy outflows as investors rotate into better-performing areas of the market.

Now is an opportune time to buy options premium on EEM, as Schaeffer's Volatility Index (SVI) of 16% arrives in the modest 23rd percentile of its annual range. In other words, short-term options on the fund have rarely been cheaper, from a volatility standpoint.

Subscribers to Schaeffer's Weekend Trader Series options recommendation service received this EEM commentary on Sunday night, along with a detailed options trade recommendation -- including complete entry and exit parameters. Learn more about why Weekend Trader is one of our most popular options trading services.


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