Here we have two markets; S&P-500 on top and emerging markets on the bottom. I have been saying since around December that emerging markets are looking very vulnerable (first mentioned it here) and we are getting very close to breaking a key low that would technically start a trend that could end in disaster.
Let's look at this on a technical basis first. In the emerging markets the past three highs put in were either equal or lower highs. The previous low put in before this one was lower, so if we break that low that I circled we would technically be in a trend of lower highs and lows (a downtrend) and from what I am seeing there is nothing but air below here. A crash is really not out of the question here unless $44 gets taken out on the $EEM index to the upside. That should be a pretty big deal for our markets but no one cares, about anything for that matter.
Meanwhile on the S&P there is nothing to even analyze, it is just a straight line up with no swing points on the monthly chart until $1350. That is all you need to know for trading/investing purposes but for conversational purposes I want to look into this a little more. So why the massive divergence from emerging markets? We have a central bank, we are the national reserve currency, and we have some incredibly stupid people making decisions for us. I know way up here that is getting old and people are tired of hearing it but it's true. We are pumping out money in an unprecedented fashion and it is completely unsustainable.
A few questions I am asking myself right now. If emerging markets crash, how is that going to effect US markets? We were highly correlated for a long time and that correlation died when the US went crazy on QE, but now we are tapering off of QE. So what does that mean? Will correlations slowly return as QE is tapered?
Emerging markets aren't the only thing that is looking like it is heading for a crash. Our very own US Dollar is headed down that same path as well. In fact if you told me that chart was some individual emerging market I would believe you. The only question is how long will people not care about this? These are two very big problems we are looking at here and no one seems to care that is participating in the US market.
People are starting to admit that we are in a frothy market and we may very well be in a bubble but who cares because no one will know for sure until it pops. Well the way things are setting up in other asset classes, specifically these two, it could get bad if things start to snap at the same time. Sure we will have plenty of time as traders to get on the right side of the trend but what does this mean for our country if our dollar crashes or better yet the world? We could be on the verge of a major change in the power structure across the world and not even know it.
It is definitely something to think about as long as you don't let it effect your trading. Also keep in mind we are looking at monthly charts so we will just have to be patient and see how things play out. This post isn't meant to scare anyone, just to promote thought about what our plan as a nation would be if shit was to hit the fan. If our dollar goes, so goes any "safety" measures our government can provide. I don't buy this idea that everything can crash and the US will be fine especially since we have been propped up on QE for five years, and since one of those assets in jeopardy is our dollar, the national reserve currency.
-Michael
P.S. - I started this post a few days ago which is why the chart isn't up to date. $EEM is down roughly 4% since I got that chart. $SPY is down a bit as well.
