As we approach the close of 2009, it’s hard not to laugh at what’s taken place in emerging markets this year.  After a complete flight from risk in 2008 which saw investors run for the hills (treasuries and the US Dollar), we’ve seen money pour back into emerging markets at a rate hard to comprehend.  We can look at the reason through many different lenses, each played a role in what’s taken place, how much of the performance we can attribute to each is up for debate.

Investors obviously placed their bets for renewed economic growth in emerging economies such as the BRIC nations, along with Taiwan, Turkey, and a host of other leaders.  Back in March, the emerging market index, along with many of its components, failed to make new lows as the S&P 500 was violating its from the panic of fall 08′.  The divergence was clear, there were no more sellers of emerging market equities left, although there was more pain to be felt through the winter in US equities.  The last stocks to give up the ghost in the $SPX were those which hadn’t been materially damaged by the economic downturn.  At the end of every bear market this takes place, the best, most sacred large cap dividend paying stocks finally succumb.

Many of the emerging market indices show beautiful double bottoms while the $SPX shows a very ugly lower low with no retest.  Of all the reasons I can think that the US rally has been so under subscribed by traders, it is the fact that there was no retest of the March lows.  Technically, the March bottom was about as ugly as it gets, there was no reason at the time to believe, based on the chart, that the action in March was nothing more than an oversold bounce.  It feels as if traders have been fighting the tape all year for this reason.  Funny to think, had we gone back down to 700, held, and then rallied, there would be more believers.

Maybe it was the rebound in emerging market currencies that fueled the emerging market equity push.  The Brazilian Real has surged off the bottom as investors fled the US Dollar for higher yields.  Three month Brazilian treasuries yield 8.8+%, you get NOTHING  in the US.  In order to make up for a falling $USDX, investors poured money into higher beta emerging market stocks looking to make up for what they were losing in dollars.

And finally, after the bet on growth in emerging markets out pacing the United States, the more palatable technical picture, and the plunging US Dollar, it was hard to ignore the opportunity in commodities as the Chinese economic monster returned.  In fact it was China which sent the $USDX flying in order to crush the commodity index in the first place.  I won’t rehash what happened in 2008, I wrote a blog post earlier this year describing it in detail, but the gist is that the commodity index topped out within a week of China putting the breaks on appreciation in the Yuan.  They did this in order to send the dollar higher and crush the commodity index, in order to buy commodities at a cheaper price to fuel their growth, without doing this inflation would have spiraled out of control.

So China’s plan worked, commodities collapsed, and they were able to buy a boatload of copper and other materials at rock bottom prices.  Commodities rebounded faster than I believe even China would have liked.  That rebound fueled runs in many commodity linked emerging market equities.  Exhibit A is $VALE which bottom out at 8.80 in November, and hit 30 a few weeks ago.

So where are we now after this dizzying run?  Which of these reasons for the rally are still intact, and what can we expect moving forward over the next few months?

Weekly View

We find ourselves at an important area of resistance.  Both the MACD and stochastic indicators are giving sell signals.  But, the primary trend is up, all major moving averages on the weekly time frame are bullish, and when we put things in context, the market isn’t overly extended.  Yes, we’ve moved in quite a parabolic fashion and are due for some consolidation, but a move through the major level of resistance shown on the chart above should take place in 2010.

The US Dollar found a significant bottom at the end of November.  We are now testing the 200 day moving average and major overhead resistance levels.  It also seems that we’ve made a higher low on the longer time frame chart.  Throughout the rally in emerging market equities we’ve seen the dollar move down in a slow and steady manner.  The past month though has seen an end to this trend.

As the $USDX has moved up, emerging markets have lagged the US indices.  An unwind in the carry trade with the US Dollar bounce has had a great effect on emerging market equities than US Equities.  I feel we will continue to see this take place as strength in the $USDX will less effect US equities in a negative fashion.

Brazil and China in purple and yellow respectively have pulled back the most whole Russia and the Nasdaq have remained strong.

The Russian index $RSX is showing great strength in an ascending triangle formation.  A break of the yearly highs should lead to the next leg up.  Buy the breakout, but be very cautious if the uptrend line is broken, we could see a longer term consolidation which tests the 200 day moving average, action here will be very dependent on what happens to crude oil $CL_F over the next month.

I love the growth story behind Turkey.  The chart here looks extremely bullish and can be bought right here.  The test of the 200 day moving average is already out of the way and all major moving averages are positively aligned in the upward direction.  This consolidation which has lasted almost 4 months will provide a strong launching pad for the next leg of the Turkish equity rally.

India has found support at the 50 day moving average and is showing some very oversold readings on the stochastic indicator.  This is your buying opportunity into the new year.  I continue to believe in the India growth story.

Brazil has broken an important trend line and looks the worst of all the emerging market indices.  We may be entering a longer period of consolidation before the next leg up in this market, a test of the 200 day moving average is likely if weakness continues over the next week.  The stochastics are very oversold, but I feel money is better placed elsewhere for the time being.  Longer term, Brazil is the major emerging market winner, they’ve done everything right, and expectations are far lower than those in China, a positive for investors here.  Of all the indices though, this may have the largest negative correlation to the $USDX, so beware if we continue to see a strong dollar.

China is approaching the 200 day moving average at a quick pace.  A major uptrend line has been broken which signals that a longer term consolidation is taking place.  Stochastics are very oversold, a bounce is likely over the next few weeks, but it will take quite a bit of time for China to gear up for another run.  Be patient.

The story out of Taiwan is amazing, this could be the biggest winner of them all as relations between the mainland and the island improve.  Economic and social ties have grown strong over the past year and the threat of war has all but disappeared in my mind.  What scares me though is that island reversal candle circled in red.  This is an extremely bearish pattern make no mistake.  The uptrend line is still intact, but I’ve thrown a major caution flag here.  If China gets going again, money may be even better spent here.  Be patient.

The general thesis here is this, I believe we are in store for a bit of consolidation in the emerging market indices.  There is no reason to believe the primary uptrend which ban in late 2008 is in danger of reversing.  Be patient and pick your spots, if we can break through yearly highs I believe 2010 will be another very strong year for emerging market equities.  I will highlight some individual emerging market names to watch in a post to come.

I’m off to hockey, have a great evening.