(Bloomberg) -- After a meltdown sparked by the U.S.-China trade conflict 21 months ago, emerging-market stocks have attempted a rebound at least eight times, and failed on every occasion.
They are now making a ninth try, and may well have the best chance of success yet.
The MSCI Emerging Markets Index is heading for its fifth weekly advance, rising for a third month, and extending its gains since the start of October to almost 8%. Technical and fundamental indicators suggest that this rally has a stronger foundation than those that came after January 2018 when such gains proved short-lived: there were four times when it jumped more than 5%, and four bouts when it climbed between 3% and 5%.
Consider the following:
The MSCI gauge has completed a “golden cross” with its 50-day moving average rising above the 100-day mean for the first time in nine months. This signals the pace at which traders are buying developing-nation equities is quickening.
What gives strength to this indicator is the supporting evidence from other patterns. The index is poised for its first close above the 100-week moving average since April.
The relative strength index on the daily chart reached the highest level since January 2018 and hovers above the “overbought” level for a sixth consecutive day. While a short-term breach of that threshold may signal a correction, a lingering presence there points to the opposite conclusion: bullish momentum.
Emerging-market equities have crossed another milestone that repeatedly proved too formidable this year. The benchmark index stayed above the 38.2% Fibonacci retracement level on each day of the week, recouping more than a third of the trade-war-related losses.
That makes 1,063 a support for the MSCI gauge, which may rise as far as 1,104, a level that has acted as a resistance at least five times since 2011. It’s “reasonable” to expect the measure will head for the 61.8% retracement level, currently at 1,145.35, which hasn’t been crossed since mid-2018, according to Piotr Matys, a London-based strategist at Rabobank.
“For this bullish scenario to unfold, it is absolutely critical that the U.S. and China reach an agreement in the coming weeks,” Matys wrote in a note. “If accompanied by plenty of reassurance that more talks will continue next year, emerging-market assets have the potential to extend their recent gains over the short-term horizon.”
With developing-nation stocks trading near the highest valuation since March, it may be tempting to dismiss them as expensive. But with analysts raising earnings estimates for the benchmark gauge at the quickest pace in 21 months, the case for equities is only strengthening.
The average forecast for the MSCI index has climbed for six successive weeks to the highest level since the start of August.
While the stars are aligning for a lasting rebound in emerging-market stocks, the main caveat to the optimism comes from the impending holiday season. Money managers may be tempted to lock in profits before Christmas and take a fresh look at risk exposures in the new year. That could spark a mini sell-off, putting the brakes on the rally.
But they still have three or four weeks to boost their bonus entitlements before signing off...
(Adds Matys comment in paragraphs nine and ten)
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