We examine sharper weakness in emerging markets and some indicators to monitor for a potential rebound.
International equities still sit at the top of our Dynamic Asset Level Investing (DALI) rankings, but their lead over domestic equities has been dwindling. The two asset classes are only separated by one RS buy signal; international equities sits at 282 while domestic equities sit at 281. This signal count has remained the same since October 8, but their close positioning has been ongoing for many months. We have not seen either asset class be more than 15 RS signals ahead of the other since March of this year. Foreign stocks have been in the lead for almost all that time, except for a brief swap in August, but have still not been able to distance themselves from their domestic counterparts. On the other hand, US stocks have performed quite well throughout most of that span but could not take over the top position in the rankings.
The technical pictures of the two main international equity benchmarks tell a different story. Both funds have nearly identical fund scores (3.40 for EFA and 3.41 for EEM), but their score direction shows notable differences. The EFA fund score dropped by just 0.90 points from its peak, while EEM fell 2.32 points. So, while the current technical pictures may be similar, EEM had further to fall.
We can look at the 1-point chart of the iShares MSCI EAFE ETF (EFA) to get a more consistent relationship between supply and demand. That chart sits in a clearly defined uptrend, remains on a buy signal reached in April, but has pulled back from all-time highs to sit below the middle of its trading band at a triple bottom formation at $102. Further support sits at $100, just below the current position, while additional support is seen at $94.
The iShares MSCI Emerging Markets ETF (EEM) has seen more near-term technical weakness. The default 1-point chart shows EEM in a column of Os and on two consecutive sell signals, trading just above support from July at $61. The chart remains in a long-term positive trend, but the recent weakness has been more pronounced. A reversal higher from here could still turn this action into a period of consolidation before further improvement. However, the outlook is bleaker now than it was a few months ago.
The next phase for emerging markets is not immediately apparent. Are we nearing the end of consolidation and going to continue higher, or is this the beginning of a broader long-term decline? Emerging markets tend to see quicker movement than the rest of the international equity space, as demonstrated by the decline over the past few weeks. EEM fell below -60% oversold last Friday, which is the lowest end-of-week OBOS level we have seen for EEM since the tariff-tantrum induced decline in April 2025. This is not below the level we would consider to be washed-out, but it does highlight a point to monitor in the weeks to come.
Another broader indicator that you can follow is the Ten Week for Emerging Market Equity Funds (^TWMUEMRGE). Like our other Ten Week focused indicators, this reading measures the percentage of all emerging market ETFs and mutual funds that are trading above their 10-week (50-day) moving average. We generally see very hot-and-cold action for this chart, meaning it will move coast to coast frequently as the emerging market funds are usually highly correlated. The extremes are still important to look at for near-term directional moves. Recently, we saw the TWMUEMRGE fall to 6%, dropping below 10% for the third time this year. That may sound like a lot, but it is relatively normal to see that many “wash-out” events for emerging market funds inside a calendar year. Still, it can be helpful to identify an opportunity that could lead to a spike in near-term demand. We can certainly see the chart push lower, and each move down from here is going to feel worse than when the indicator drops an O higher on the chart. Seeing this chart reverse back up would point toward a reprieve for emerging market declines.
