Emerging Market continues to underperform SPDR S&P 500 ETF (SPY, quote) and additional signals from commodity and currency markets should be causing concern.
We correctly called the recent top of this spread at the end of the year, but we have been wrong on re-entering this trade too soon. In fact, our call was to pick levels around .2950 on the spread (4.5% higher).
Having breached all Fibonacci levels to this point, the next place to take a look is .2757 (-2% lower) on the emerging market vs. domestic market trade.
Now down 10% to SPY, the iShares MSCI Emerging Markets Index Fund (EEM, quote) needs to look in the mirror and question where the next leg higher will come from.
China has played a major role in this weakness but the rest of the BRIC have also been dead weight or subtractive. Currencies and commodities tell you that if China can’t fire up the engines, we can break lower.
All of this has come during a period when fund flows into emerging markets have been stellar. All of this also sets up the SPY for some questions too, however, if cyclicals are suffering, people will begin to wonder whether the U.S. can surf this ocean alone, as the European Union begins fresh austerity and China stumbles on itself.
