Emerging markets and the S&P 500 are like partners in a three-legged race. As long as they’re both standing upright and moving forward, the race continues. But, when one partner falls, it’s just a matter of time before the other partner stumbles as well.
Oh sure, the upright partner might be able to drag the fallen partner along the track for a little while. Eventually, though, they’re both going to hit the ground.
And that fact should worry investors – because in the global stock market three-legged race, emerging markets have fallen down.
Look at this chart of the iShares MSCI Emerging Markets Fund (EEM)…
Now look at the chart of the S&P 500…
The blue circles on the charts highlight the times over the past two years when the S&P 500 continued higher while the emerging markets stumbled. Each of the previous three occurrences was followed by a sharp decline in the S&P 500.
In June of 2018, for example, the S&P fell 100 points in just three weeks. The 600-point correction in the S&P during the fourth quarter last year came on the heels of a decline in emerging market stocks. And, the 200-point drop in the S&P two months ago followed a downturn in emerging markets.
We now have a similar setup.
The S&P 500 has been rallying. The index broke to a new all-time high just last week. But, emerging markets are trading about 5% below the high they reached in April. And, EEM has been falling all through July, while the S&P has been rising.
This sort of divergence has often been a good warning sign of an impending correction in the S&P 500. It’s just another reason, in a growing list of reasons, why investors should be a little cautious on the broad stock market right now.
Best regards and good trading,
P.S. Before you go, one last reminder…
My colleague Jeff Brown just made a big announcement about his new trading system. Like I said all last week, it’s unlike anything I’ve ever seen before.
I wanted to make sure you had the chance to watch Jeff’s Accelerated Profits Summit… before it comes down at midnight tonight. You can still watch him reveal his new system – and learn how to access his first three trades – here.
In today’s mailbag, a Jeff Clark Trader subscriber comments on the service…
Prior to this publication, I had never speculated using options. Jeff has done a great job simplifying this strategy of trying to turn a dollar into three dollars with less risk. His explanations of how to look for the particular patterns which could result in double- or triple-digit gains is what I have taken away the most rather than simply the monthly recommendations.
Thank you, as always, for your thoughtful insights. We look forward to reading them every day. Keep them coming at [email protected].