Evidence is growing that the rally in developing-nation stocks is no blip.
The 15 percent rebound in the MSCI Emerging Markets Index since it touched a 6-1/2-year low in January has been underpinned by improving inflows into stocks and higher trading volumes, suggesting that money managers are becoming more convinced the gains are sustainable. The gauge headed for the longest streak of gains in almost 11 months on Monday and was less than 0.1 percent from erasing its 2016 losses.
What’s more, several technical indicators show the momentum in stock prices may be gathering pace despite concerns over the slowest Chinese growth in a quarter century, oil prices that are below the budget assumptions of governments including Russia and the threat of outflows when U.S. borrowing costs rise.
“There is scope for further gains,” said William Jackson, a London-based emerging-market analyst at Capital Economics Ltd. which projects a 25 percent gain in equities in the next two years. “The selloff at the beginning of the year was overdone. Growth in China hasn’t fallen off a cliff and oil producers aren’t struggling as people thought they would.”
Investors added $2.31 billion to U.S. exchange-traded funds that invest in emerging markets last week, the biggest inflows since April 2014. A measure that compares trading volume on days the MSCI gauge rises with that on days it falls climbed to a 2016 high last week, signaling the worst selling pressure may be over.
The five charts below indicate the rally may continue.
Relative Strength Index
For the first time in almost seven years, the MSCI gauge’s monthly price chart fell near a level where traders typically bet a selloff has gone too far. The last time it happened in 2009, stocks surged 144 percent in just over two years.
Emerging-market stocks have recouped more than 23.6 percent of their decline between April 2015 and January 2016. That’s a sign to some traders the gauge may rise toward the 832.8 level, about 5 percent higher than last week’s level.
The MSCI gauge closed above its 100-day moving average on Friday, for the first time in nine months. Investors tracking technical patterns consider moving averages to be “lagging indicators,” or ones that emerge after a trend has been set in motion.
The so-called MACD graph and stock prices are moving differently, as shown by the yellow lines on the chart. In technical parlance, stocks have been making “lower lows” and the MACD has been making “higher lows.” This divergence suggests bearishness is reducing.
The so-called Percent B signal in the bottom panel of this trading envelope chart shows where the prices are relative to their historical moves, adjusted for volatility. It reached the highest level since June 2014. If it stays high on successive days, some traders would consider it bullish.
“Risk appetite is back in the market," said Benno Galliker, a trader at Luzerner Kantonalbank AG in Lucerne, Switzerland. “Not all participants are 100 percent convinced it is going to go much higher from here, but just in case, nobody wants to miss the rally.”