The stock market has been the place to be since October for sure. Climbing a classic wall of worry double–digit gains have been made in many global markets, economic recovery in the U.S. being the main driving force of the increasing optimism.
The U.S. economic recovery continues to pick up momentum, most recently evidenced by Friday’s surprisingly positive employment report.
And where previously the negative reports from Europe, particularly on the eurozone debt crisis, were dominating the headlines, with concerns the crisis would push Europe into a recession that would spread to the rest of the world, now we have the economic recovery in the U.S. becoming the dominant story in global headlines.
Focus is beginning to move from will Europe pull the rest of the world down, to can the U.S. economy pull the rest of the world up.
The market’s favorable season typically lasts until April or May. Our Seasonal Timing Strategyhas sometimes not triggered its exit signal until June.
And the U.S. and many global markets have broken out impressively above their long-term 200-day moving averages, implying their bull markets have resumed after last summer’s substantial correction.
However, previous pessimistic and bearish investor sentiment began to turn more bullish when January did not bring the ‘crash’ and new bear market the doom and gloomers were predicting, instead becoming the best January in many years.
And the flood of money jumping in in January has many global markets looking short-term overbought, extended above 50-day moving averages to a degree that usually soon brings a pullback at least down to a retest of the support at the m.a.
But some global markets have lagged behind, leaving investors with a choice of chasing those leaders with strong relative strength that may be short-term overbought, or going with the laggards on hope they will play catch up.
For the most part, emerging markets fall into the latter category, just now seeming to move above 200-day moving averages, as they have gotten a lot of investor attention in January.
The contrast between the lack of buying in the first three months of the rally and the enthusiasm of the last few weeks is obvious.
Data provider EPFR Global reports that $11.3 billion has flowed into emerging market equity funds since January 1, and the pace has accelerated dramatically, with $3.5 billion of inflow just in the week ended Feb 1.
As a result short-term, emerging market equity funds have surged up 15% so far this year compared to the average global equity fund being up 8%.
So, investors need to think about whether, even though emerging markets have been lagging, still in the vicinity of their 200-day moving averages, they might also be potentially just as overbought short-term. The short-term charts seem to indicate that is the case.
To read my weekend newspaper column ‘Wow! The Economic Recovery Surprises Continue!’ Click here.