Buy Emerging Markets…But Carefully

Emerging markets were under pressure all summer from fears that the U.S. Fed would begin to taper back its QE stimulus. More recently, it was widely expected the battle in Washington over raising the debt-ceiling would add to the selling pressure.

However, charts reveal what a market is actually doing, not what people think it should be doing. And in reality, emerging markets in general have been rallying off an oversold condition beneath 20-week moving averages, even as the U.S. market was pulling back from its September peak on the new debt-ceiling worries.

Essentially, emerging markets have been struggling since 2011. Many have been in bear markets, with declines of as much as 35%, and with only bear market rallies since 2011.

Given the risk in individual countries these days, we prefer a diversified emerging-markets mutual fund or ETF, rather than choosing individual countries or individual stocks. And given the potential over-valued condition of the U.S. market, and its proximity to five year highs, there may well be more potential in markets that have already experienced bear markets, and are rallying off lows.

Most recently, technical indicators had been on a sell signal for the VanGuard Emerging Markets ETF, since its peak early this year. In its tumble from that peak it fell 18% to its summer lows.

However, it found solid trendline support again. Our technical indicators triggered a new intermediate-term buy signal. And it launched into a new rally.

The ETF has since broken back above its 20-week m.a., which was previous overhead resistance, and which is now likely to be downside support on any pullbacks for a while.   Our initial upside target is 46, the level of its last two rally peaks. But if it can break above those, next resistance should be at its 2011 high.

The current dividend yield is 3.36%, and the fund has a low expense ratio of just 0.18%. Meanwhile, it is selling at a P/E ratio of only 12, compared to the S&P 500’s P/E Ratio of 19.

VWO is a large fund, with 1.2 billion shares outstanding, and a market cap of $50 billion. It is widely diversified. Its twenty largest holdings are only 21.7% of its total holdings.

Those largest holdings include Taiwan Semi-Conductor, Petroloeo Brasileiro (Brazil), China Mobile, China Construction Bank, CNOOK (China Offshore Drilling), Gazprom OAO (Russia), America Movil (Mexico), Mtn Group (South Africa), Sasol Ltd (South Africa), Hon Hai Precision (Taiwan), and Infosys (India).

The new expectations that the Fed will not begin tapering until sometime next year should provide a further tailwind for emerging markets, as should any agreement to temporarily end the government shutdown and raise the debt ceiling.

Other emerging market ETF’s on which we have similar buy signals include the SPDR Emerging Markets etf, symbol GMM, and the SPDR Emerging MidEast/Africa ETF, symbol GAF.

In the interest of full disclosure, my newsletter and subscribers have positions in the VanGuard Emerging Markets ETF, symbol VWO.

********

Sy is president of StreetSmartReport.com and editor of the free market blog Street Smart Post. Follow him on twitter @streetsmartpost. He was the Timer Digest #1 Gold Timer for 2012 (Gold Timer of the Year), as well as the #2 Long-Term Stock Market Timer.