Emerging Markets (EEM, quote) trading lower today on a series of macro issues and market specific dynamics. Much of the weakness has been follow through from a weaker Asia session and developed markets which frankly look to be in no man’s land technically.
China macro and technicals clearly weighing on the asset class. China Services PMI came out last night at 50.0 which is the lowest reading on the series since its inception. This was far below expectations of 53.1 and doesn’t mesh with a view that China macro has turned the positive corner.
The Manufacturing PMI levels of last week were seen as evidence China (FXI, quote) is recovering and possibly stimulating their industrial economy. Yet, even though Services PMI is far less significant than the closely watched manufacturing reading, it is tough to reconcile the dreadful reading last night for an economy on the rebound.
On the technical side , there has been a few headlines that noted market timer and hedge fund advisor to the stars, Tom DeMark, was recommending to sell China stocks into strength as the SHCOMP was hitting overbought levels and exhaustion points were coming. Shanghai has been driving sentiment overall higher and if Mr. DeMark is correct, overall Emerging Markets may give some ground.
Having said all that, we maintain that the Emerging Markets vs Domestic Markets (SPY, quote) trade will continue to work. I mentioned last night on Fast Money how Emerging Markets has outperformed Domestic Markets by 400bps YTD and that we were targeting over 1000bps of outperformance in 2014.
However nothing moves in straight line and shouldn’t for that matter. We have guided that we think the spread takes a breather at .2300 a place where it has paused 2 other times since Emerging Markets bottomed vs SPX in March and bean a solid reversal. Yesterday after 3 days of Emerging Markets outperforming Domestic Markets in the face of rising rates fears and fed removing the tasty punch from the market, we kissed the .2300 and like clockwork we pulled back.
Today Emerging Markets is underperforming SPY by 60bps and we think you can trade this another 25pips on the Emerging Markets/Domestic Market spread before buying the spread again.
We are currently at .2277 and think there is good support and rationale for re-entering the spread trade at .2250 area.