As we wrote in our earlier post, 2018 is the year of losers. There are some few recent relative bright spots though, that we have been mentioning this autumn. Emerging Markets were to blame as the early October sell started. Price action in this space was horrible, but we started pointing out the reverse was about to start unfolding, i.e. we explained our logic for a relative long Emerging markets stance versus developed world (SPX). Earlier this autumn we wrote:
A mix of; falling oil prices, a “pause” in the Fed´s rate hiking cycle and a softer USD could all be leading to an interesting set up for Emerging Markets going forward.
So, what has happened?
The DXY index is falling hard today and is trading below the 50-day average for the first time in months.
While SPX, NASDAQ and other developed markets indices continues crashing, the EEM hasn’t even traded down to October lows. The trend is still down, but the Emerging Markets space has outperformed well relatively speaking.
The EEM versus SPY spread we mentioned as an attractive “going against the crowd” trade earlier this autumn has performed very well, and continues giving. Given the recent Fed “dilemma” we believe this trade can continue to outperform relatively speaking for a bit more.
It sounds crazy, but VIX is trading above the VXEEM (Emerging Market “VIX). This is a rarity that we don’t think will hold longer term, but it just shows how wrong the crowd is. Our take has been that the crowd continues getting smoked, and with the recent USD action, more pain is being felt among hedg(ed) funds, as the crowd remains long the USD.
Regarding the overall market direction, we are getting a bit nervous about the short view over past 24 hours. After all, CTA index (the underperforming crowd), seems to have flipped to net short recently.
CTA index versus the SPX index. SPX down, CTA index up. In a low liquidity market, this can become painful should a bounce suddenly occur.
