While the US markets power towards higher highs – although in a weak manner we might add, we've begun to see outflows of funds from the Emerging Markets. Ostensibly, this is due in large part to the Egypt uprising, but there are other issues the emerging markets are facing such rising inflationary pressures and rising food prices. Many believe these circumstances to be transitory; but perhaps they shall be with us longer than anyone anticipates, and the impact upon the emerging market stock markets should not be dismissed so easily.
To this end, we find it instructive to look at the monthly charts of various emerging markets, and Brazil in particular. What we see is that the rally off the 2009 low is rather sharp at over 100%, and we find that Brazil's BOVESPA follows its 16-month moving average rather nicely. What concerns us is that prices have now broken through sufficiently to call this a new bear market, but we need to see whether prices shall remain below it and close below it by month's end. If not, then it shall prove support and new highs would be forthcoming. But when one looks at the 5-month RSI divergence, then one gets the sense prices are indeed going into a bear market.
Therefore, if a bear market is indeed underway – then we would be naïve to believe that the US can escapes significant weakness in the face of emerging market weakness since it was the emerging markets that led the US out of its bear market.
Good luck and good trading!
