New Buy Signal, with Reservations

We have been enjoying an energetic uptick in stocks over the past few days. It’s a powerful move, although not yet decisive. If it continues, it will be very good news indeed. It has lifted stocks globally, including beaten-down Chinese issues, raising hopes for a durable rally. This is happening despite continued bad news on the Chinese economy, on global trade and European worries. If the market really is looking six months ahead, it’s liking what it sees, for now, at least.

The iShares MSCI Emerging Markets ETF (EEM) has pushed above its 25-day moving average and that average is just beginning to tick higher. By the letter of the law, this represents a new buy signal, but there are a couple of reservations. First, the Golden Dragon China ETF (PGJ) is not confirming the buy signal. Second, EEM still hasn’t gotten out to new five-week highs, which would be above 30.7.

We will honor this signal by filling out our stake in XRS. We think it’s prudent to give this nascent rally a couple more days to prove itself before putting a load of money back to work. Young rallies can be fragile, and we don’t want to overload one this early in the process. If we see confirmation that the bulls are really changing their minds about emerging market stocks, we will be ready. For now, we’ll be a little cautious.

The major indexes opened the day up, but drifted lower during the day, finishing with modest losses in the Dow and the S&P 500 but a 1% dip in the Nasdaq. At the close, the Dow was down 41 points (0.25%), the S&P 500 fell 9 points (0.47%), and the Nasdaq slipped 47 points (1.03%). The iShares MSCI Emerging Markets ETF (EEM) lost 18 cents (0.59%).

This is an excerpt from Cabot Emerging Markets Investor, which seeks to capitalize on the enormous potential in emerging market countries. Chief Analyst Paul Goodwin has been a researcher and writer for over 30 years and a member of the Cabot investment team since 2005.

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Paul Goodwin can be found on Google Plus.

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