The attached chart of the Russell 2000 shows a breakdown that many have been calling for but has yet to really unfold.

Emerging_Markets_MapThe Russell 2000 Index (IWM, quote) encompasses US small cap stocks that often are much more sensitive to fund flows, sentiment changes, and of course, the fundamentals of the economy. 

Historically, Emerging Market investors have seen high correlation between the Russell and the Emerging Market equity landscape.

Much of that landscape in the last 18 months has been broken in an upswing for US stocks while EM has languished.  A breakdown, however, in the Russell will be a test for EM. 

Using the Russell Index as a hedging tool for your EM longs gives you higher beta coverage in a broader market selloff. 

Note:  No hedges are sure things and one of the dangers of long short investments is that both sides of a trade can work against you. 

If you were long EM and short the Russell on a 1yr basis, you would have lost 25%. We are looking for a breakdown in the Russell at the 200mda to be a signal broader selloff for this index which to this point has shown amazing resilience, but a rotation from growth to value currently underway must recognize the Russell trades at 62X current earnings vs 11.8X for the MSCI EM (EEM, quote).sg2014041736923

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