Great Graphic: S&P 500 and Emerging Market Equities Constructive Outlook

This Great Graphic was composed on Bloomberg and depict the performance of the S&P 500 (white line) and the MSCI Emerging Market Index (yellow line), in a log chart, from the start of last year.

Although a number of emerging market currencies have been under strong downside pressure in recent days, the big sell-off in emerging market equities took place in May and June.  

There has not been as much decoupling as it may seem.  On a rolling 60-day basis, the correlation of returns (percentage change) is about 0.47, which is the mean and median since the beginning of 2012. 

The latest swoon in the emerging market index corresponded to the head and shoulder top bottom we identified.  The downside correction in the S&P 500 appears to have run its course and this is consistent with a near-term recovery among emerging market equities, even if the longer-term adjustment is not over.

The minimum target of the head and shoulders pattern was near 1650 and low last week (~1639)was nearer the 50% retracement of the rally off the June 24 low (~1560) which we noted was about 1635. The strong close before the weekend, above 1660 suggests near-term potential toward the gap left on the charts from the lower opening on August 15.  The bottom of the gap is just below 1680 and the top of gap is just below 1685.  The RSI is turning up and the MACD's are poised to also turn higher.  

The MSCI Emerging Market Index closed near the highs on August 22 and 23.  The close before the weekend was above the five-day moving average.  The RSI is constructive, though the MACDs are less clear.  While the 941 area (about 1% above the Aug 23 close) needs to be overcome, the real challenge is the seen closer to 947-950.  Above there and the July and August highs near 970 come into view.