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While students at most colleges and universities are busy prepping for upcoming finals, the ETF that tracks emerging markets is getting ready for its own big test of a key moving average. In the immediate aftermath of the election, emerging market equities were one of the biggest losers, swiftly falling over 9%. However, after more or less holding support at the 200-DMA the iShares Emerging Markets ETF (EEM) has rallied back close to 7%. At yesterday’s close, though, the ETF finished the day right below its downward sloping 50-day moving average. Whether or not it can pass this test will be a key driver of sentiment for the sector in the coming weeks. There are countless examples in the annals of chart history where stocks or indices have shown this pattern only to stall out right about here and go on to make lower lows. Therefore, if EEM can take out its 50-DMA, it will set the stage for a strong close to the year.
One fact that could be working in the sector’s favor is a recent report from Standard and Poor’s, which stated that:
“We believe it may no longer be possible to separate advanced economies from emerging markets by describing their political systems as displaying superior levels of stability, effectiveness, and predictability of policy making and political institutions”
The above was the same line of reasoning we believed justified higher valuations for US assets in the aftermath of the Brexit vote and is a view we continue to hold following political instability in Europe. Additionally, while the comments from S&P seem to suggest that advanced economies should no longer warrant higher valuations relative to emerging markets, that narrowing would likely come as a result of valuations meeting somewhere in the middle (higher valuations in emerging markets and/or lower valuations in advanced economies).