I created the index below by dividing EEM by EFA. (This is not an index you can look up) See chart for more thoughts and details!
CLICK ON CHART TO ENLARGE
This composite gives very few macro buy/sell signals, suggesting risk is greater or lesser. At (1) in the above chart is the first suggestion that risk is really increasing since the summer of 2008!
This sell signal suggests that the BRIC countries should be relative underperformers!
William…not a full proof indicator by any stretch, yet when this indicator does turn up, overweighting towards the BRIC ETF’s has paid of in spades!
See this link for my chart applied to the 500 index-
http://dshort.com/articles/2011/0213-EEM-EFA-indicator.html
As Doug shares in his post, this decline in the index often times has suggested caution should be applied to equity positions. Hope this helps a little bit.
Hi Chris, Do you see a double-top, in the BSE (Bomnay Stock Exchange)long-term chart? Do you think there is more downside? Thanks for all the fine work.
Chris, for a novice like me, can you explain how dividing EEM and EFA is so significant of a sell signal? It looks very striking what you’ve put together, but I can’t really understand what it is I’m seeing.
Belsha…Thank you. I am not saying one leads over the other. This chart is effect by relative performance. Take yesterday, EEM was off over 2%, EFA was off just a fraction, which would push this index down all the more. If you owned the “market neutral spread trade” due to this index, short EEM and Long EFA, it would have been a very good day!
Chris, fantastic chart !
Seems to me thought that the opposite happened in 2008, EM continued rallying when devloped markets already started correcting in late 2007. Last time, developed led emerging. Does emerging lead developed now?
Nice chart 😉
Andrew… A popular concept/strategy is called “market neutral” where you are long one investment and short the equal of another. When this index is rising you would want to be long EEM and short EFA. When it falls you want to be short EEM and long EFA. That is one take on this index. The other message with the breakdown and the index dropping below the 200-ema….BE OUT OF BOTH!!
The breakdown of this index suggest “relative weakness” should take place in the BRIC countries. EFA could fall, it is just suggesting that the BRIC would fall more!
So this indicates sell EEM but not EFA? or both?