Too Soon To Bet Emerging Markets Are Emerging But...

Inflation. High interest rates. Recession.

Yes, developed countries have been hard hit by the above Big Three. But emerging markets have been whacked even harder. Just over the weekend, The Financial Times reported that foreign investors have pulled funds out of emerging markets for five straight months - the longest streak of withdrawals on record.

As we know, timing is everything. And while it may be too early to make the bet that emerging markets are turning around, there has been evidence this year that after dips in emerging market funds, there have been some trading opportunities.

At Excalibur Pro, one of the tools that we use to be better understand trends and momentum is the Markov process. With Markov, we look for state changes and then track price performance after those changes occur.

The chart below shows Markov and price performance for the MSCI Emerging Markets ETF. This year, we see an interesting trend when the two states cross and later re-cross. The state changes currently are correlated with higher and lower price movements. For example, state 2 crossed state 1 on March 3. And then recrossed on March 18. Over that time period, the ETF fell 3.18%

The ETF then drifted slightly lower until the next time that state 2 crossed state 1. From when that occurred on May 5 until then recrossed on May 19, the ETF fell 6.4%

But now look what happened from May 19 until June 9 - (with June 9 being the date of the next state 2 crossing state 1): the ETF rose 6.5%.

From June 9 to June 16 - the period during which State 2 crossed and remained higher than state 1 - you saw an 8% price drop in the ETF. From June 16 to now - the ETF is up a little more than 1%.

So, state 2 crossing above state 1 has led to price declines. And state 1 crossing above state 2 has shown price gains or very small losses.

It's worth keeping an eye on.