1/ Dollar Tailwind Ahead for EM Equity?
2/ Watch Out for US Home Construction
3/ Quantum Computing + Momentum
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1/
Dollar Tailwind Ahead for EM Equity?
Emerging Market (EM) equity is receiving a lot of attention as of late – and rightfully so. The MSCI EM Index (USD) is outperforming the S&P 500 by over 3.5% year-to-date. Participation is not just limited to China – markets such as South Korea, Brazil, Mexico, and South Africa are joining the party. This is all despite a struggling and beaten down India equity market. India stocks represent ~20% of the EM Index. The MSCI India Index (USD) is -4.9% year-to-date and -10.7% over the trailing 6-months. Despite this, EM Equity is outperforming nearly every other asset class year-to-date.
The above chart displays the ratio of EM Equity to S&P 500 Index – the ratio is overlayed with the US Dollar Index, set on an inverted scale. The chart highlights how a weak or declining dollar can provide a tailwind to EM stocks. The dollar is expected to remain strong under the current Trump Administration, but so far in 2025 the greenback continues to move counter-trend and is now testing a well-defined support level ~106. EM stocks can certainly advance alongside a strong dollar, but EM bulls are hoping for a helpful boost from King Dollar.
2/
Watch Out for US Home Construction
The above chart displays the Dow Jones US Home Construction Index, including the index’s 200-day simple moving average. To end 2024, the index broke below its 200-day average. In the weeks that followed, the industry group failed to recover above the 200-day and is now breaking down to new lows. The chart also highlights prior breaks below the 200-day average and the resulting drawdown. Bad things tend to happen below a declining 200-day average. From a trend-following perspective, there isn’t much to like about this industry group index.
3/
Quantum Computing + Momentum
Quantum computing stocks are receiving a ton of attention given the global boom in artificial intelligence and machine learning technologies. The below chart highlights an index of quantum computing / semiconductor stocks. The lower pane represents the 200-day Disparity Index. The Disparity index measures how far away an asset’s price is from a set moving average.
Some investors view a high reading as indication of the stock being over-extended, or ripe for a pullback. But for those who understand momentum, a high reading would indicate strong positive price momentum and therefore be assumed to continue. The prior cycle was a great example of just that. In early 2021, the 200-day Disparity index reached an historically elevated level, in the 12-months that followed, the index continued its trek gaining ~20%. Now, that isn’t to say we’ll see the same sequence play out – highly doubtful – but in my experience, trends can continue on for a lot longer than majority of investors assume they will. Just because an indicator is flashing “overbought” doesn’t mean the trend isn’t valid or the asset must correct in price. Quite the contrary.
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Originally posted 21st February 2025
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