Short Takes

EEM remains weak, but still has several forms of possible support just below. Note the areas where lines have acted as support (green arrows) and resistance (orange arrows) in this chart. Several of these lines remain below the current price (see far right of chart).

Emerging Markets ETF EEM

As far as diversification goes, EEM is diversified with holdings in 23 different countries and across 10 different sectors. The largest exposure to a single company is less than 5%, which means risk is not concentrated in one stock, one country, one currency, or one sector.

EEM Sector Breakdown:

Financials 26.16%
Information Technology 13.61%
Energy 12.42%
Materials 11.65%
Consumer Staples 8.84%
Consumer Discretionary 8.00%
Telecommunication Services 7.74%
Industrials 6.56%
Utilities 3.30%
Health Care 1.24%

EEM Holdings By Country:

China 17.77%
South Korea 15.17%
Brazil 12.58%
Taiwan 10.57%
South Africa 7.75%
India 6.60%
Russian Federation 6.00%
Mexico 5.14%
Malaysia 3.50%
Other 14.70%

Another form of diversification is the large cash position we are still holding, which “offsets” any volatility in EEM.

Consolidation or Correction

Extended markets with poor risk-reward profiles tend to either consolidate (move sideways) or correct. Markets with very strong trends are candidates for consolidation. It is possible that is what happened over the past six weeks or so.

Evidence of Bullish Turn

We have been patient while diligently searching for attractive risk-reward entry points. We prefer to buy markets (a) after a pullback and (b) after evidence of a turn back up surfaces. In terms of a favorable set-up from a probability perspective, emerging market stocks fit the bill. EEM dropped 6.2% from the early January highs to the recent low.

Emerging Markets Break Out

In the chart below, you can see EEM also “broke out” this week in a manner similar to the bullish move in late November 2012 (see “Favorable risk-reward entry point”). Prior to the breakout in 2012, a bullish MACD cross formed (black > red near left green arrow). A similar bullish MACD cross occurred this week helping define a similar “favorable risk-reward entry point”.

Think In Probabilities

If we are patient and find set-ups like the one above, the odds will be in our favor. If the odds are in our favor and we execute properly, we should have a bright future. The term “odds” admits in advance we may be wrong. We may be wrong on this buy, but over the long-run charts like the one above will produce more winners than losers. EEM has a better “set-up” relative to the extended U.S. market.

This Week’s Video: Can be found here.

According to Bloomberg:

China’s growth slowed more than forecast last quarter as exports and domestic demand cooled, boosting pressure on Premier Wen Jiabao to loosen policy further and shore up expansion in the world’s second-biggest economy.