Looking at the chart below we find the price for the emerging market ETF – EEM on its own outright and on the spread against the SPY ETF. The later we often refer to as the "EM/DM Spread".

emerging-markets-BRIC-MINTAs you can see since global markets found their base in the mid December selloff, emerging markets have actually outperformed the S&P 500 including Europe. We have seen multiple false starts and rallies on this spread over the years thinking emerging market equities might be turning to change a long term down trend.

In fact the move on this spread from close to .40 in October of 2010 to the lows we saw in mid-December of .1865 has included numerous places where emerging markets looked ready to make a long term outperformance shift.

In hindsight it's easy to see why macro fundaments didn't match up and ultimately led to reversing fund flows.

Chart_ EEM

In the short term we do think the U.S. earnings season could be a catalyst to emerging market outperformance. This morning we have already heard from a handful of multinational companies (TIF, SAP for example) who have cited USD strength for headwinds to earnings.

We also know about oil prices and the impact we will see from the energy sector on overall SPX earnings. Add in an earnings multiple of about 17X on the SPX and you have room for multiple contraction. Emerging markets will always be sympathetic to a global growth downgrade but that is exactly what had US stocks outperforming and EM underperforming since the highs were set into September.

Don't line this up for a multi-year spread trade but watch and play for near term emerging markets outperformance is the Dollar trades sideways and 4Q earnings in the U.S. are challenged.

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