This year has been a roller coaster ride – especially for one corner of the global stock market.
Emerging markets were up 11% for the first half of 2019. Then the bottom fell out.
Economic unrest and trade war escalations spooked investors. They sold first and asked questions later. And the panic drove prices down too far, too fast.
Emerging markets have erased most of the gains they built up in the first half of the year. They fell 10% in a single month. But the major fall is creating an opportunity.
History says the overreaction is setting up a short-term buying opportunity… And a 16% gain is possible over the next year.
Let me explain…
The broad term “emerging markets” includes a good chunk of the world.
Markets like China, South Korea, India, and Brazil are all in this category… along with many more.
This group includes many fast-growing economies, which means emerging markets can see big swings higher and lower.
That’s what’s happened recently. After a great first half of 2019, emerging market stocks had a major reversal that wiped out nearly all their gains for the year.
The good news is, the recent fall is most likely an overreaction.
The best way to see it is through the relative strength index (“RSI”). This is a simple tool that makes it easy to see when investors have gotten ahead of themselves. And it’s a great contrarian indicator.
For example, when a stock falls below an RSI of 30, triggering oversold territory, a short-term rally is likely. And what’s happening today is an even stronger overreaction…
Recently, emerging market stocks fell below an RSI level of 25. It was their lowest RSI level since 2015. And it’s an occurrence we need to pay close attention to today. Check it out…
This chart shows the sharp drop for emerging markets in July. And it shows today’s oversold level… the worst since 2015.
Don’t let this scare you, though. This situation is setting up a major opportunity.
Since 2003, whenever emerging markets fell below and jumped back above an RSI level of 25, it led to significant outperformance over the next year. Take a look…
For nearly two decades, emerging markets have performed well… returning almost 8% a year. But buying after a panic like today’s could double that return…
Similar instances have led to 6% gains in three months, 11% gains in six months, and a solid 17% return over the next year. That’s impressive compared to what you get with a typical buy-and-hold strategy.
Even better, emerging market stocks have bounced back out of oversold territory, showing that a rally is likely. But the downtrend is still in place. So you need to be patient before putting money to work.
Once prices begin to rise, you can easily capitalize on this idea through a simple fund like the iShares MSCI Emerging Markets Fund (EEM). This fund holds a broad basket of emerging market stocks.
It’s the easiest way to take advantage of the setup we have right now. But again, make sure to wait for the uptrend before buying.
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Source: Daily Wealth