EM contrarian and momentum opportunities – Humble Student of the Markets

Mid-week market update: Instead of just focusing on the U.S. market, I offer these two mystery charts of EM markets. One is a contrarian play, the other a momentum play.

Mystery charts revealed

The top chart, the contrarian play, is MSCI China relative to MSCI All-Country World Index Ex-US. The latest BoA Global Fund Manager Survey shows that growth expectations for China is at a historic low. Is this the bottom? The relative performance chart shows a constructive pattern of holding relative support.

The other chart, the momentum play, is MSCI Mexico relative to MSCI All-Country World Index Ex-US. As the West de-couples from China, Mexico has been a significant beneficiary of near-shoring. This podcast outlines the opportunities in Mexico, as well as the growth constraints such as infrastructure and crime.

Pick your poison.

Incomplete correction

As for the U.S. market, I believe that the correction in the S&P 500 is still incomplete. The index tried to rally above its 50 dma but failed.

Equally disturbing are the definitive breakdowns in relative support of small-cap indices (bottom two panels).

As well, the semiconductor stocks, which are the leaders in the AI boom, are forming a possible head and shoulders pattern with the caveat that H&S formations are incomplete until the neckline breaks. The early bearish “tell” is the inability of these stocks to hold relative support.

In conclusion, I believe that the S&P 500 is undergoing a pullback. My base case calls for support to hold at the August lows of about 4350, though further downside is possible. In the meantime, investors can find both contrarian and value opportunities in emerging markets.