Emerging market proxy EEM moved to a buy signal against SPXEWI for the first time in over 4 years. What could this mean?
Friday’s report touched heavily on the recent strength from international equities. Also of interest late last week was a notable relative strength development on the international front. As mentioned on Friday, emerging markets have done quite well recently as China’s leadership has been somewhat steady (quite a rarity in the somewhat recent past.) With that in mind, the recent upside action for emerging markets has been consistent enough to see representative EEM return to a buy signal against SPXEWI for the first time since late 2020 on a 3.25% relative strength (RS). This chart is pictured below.
This chart presents quite an interesting bull and bear case for emerging markets, both equally compelling. Starting for the bears- the last decade of this specific relationship hasn’t been particularly additive. In fact, following signals on this specific chart would have been a net negative as emerging market rallies ran out of steam after posting buy signals, speaking to the lack of staying power from international upside the last decade. On the other hand, bulls will point to the fact that over the entire ~35 years of relative strength history on the NDW platform, following a relative strength switching strategy (owning whichever asset is on an RS buy signal) has still beat a simple buy and hold strategy of either asset on its own…. Despite generally underperforming over the last decade.
All this to say, continue to watch the international space closely. A few closing points: EEM remains on a relative strength sell signal against the cap weighted S&P 500… speaking to where strength sits on the domestic front. Both domestic and international equities score strongly when looking across NDW’s DALI or Asset Class Groups Scores Page, and we wouldn’t recommend taking this RS chart development alone as a signal to pursue broader asset allocation changes. Regardless, the case for prolonged international strength becomes increasingly stronger as the technical picture continues to improve.
