We’ve been writing for the last several weeks here, here and here that a good buying opportunity for EM stocks would likely avail itself soon, but that we were not quite at the sentiment lows seen at the other good buying places in 2008 and 2011. We don’t know if we’ve seen the ultimate cycle price low in EM stocks, but we can easily make the case that we are at or near the emotional low as most of our indicators have either reached or breached the low levels they made in 2011.
In assessing whether we have reached a sentiment low, we are using as a benchmark the selloffs that culminated in an initial low for the markets in October 2008 and September 2011. Sometimes, the emotional low in the markets will precede the actual price low, but not always. In the 2008 case, the sentiment and price low for the MSCI EM index was achieved coincidentally on October 28th. In the 2011 case, the sentiment low was reached on September 26th while the MSCI EM Index didn’t bottom until October 5th.
In the charts below, we show some of our indicators of market breadth that help us gauge sentiment in the markets. When these indicators get to extreme low levels, it indicates indiscriminate selling of stocks, because nearly all stocks are participating in the decline and simultaneously making new lower lows in price and trend. It is at these times when markets are at or near their price bottom and hence the best time to buy because everyone who is going to sell has already sold. No indicator is perfect, but when taken together these tools tell us that market behavior towards EM stocks has reached a negative extreme only seen at other excellent lows in prices.
These first two charts show the percent of stocks in the MSCI EM Index that are above their 65-day (chart 1) or 200-day (chart 2) moving average. The higher these indicators, the stronger the trend in the overall market, and vice versa. Both of these indicators have reached a low only seen near the market bottom in 2008 and 2011.
These next two charts show the percent of MSCI EM stocks that have made a new 65-day (chart 3) or 200-day (chart 4) low in price. The higher the number, the broader the participation in the decline by individual stocks. These two indicators are at extreme levels only seen near the market bottom in 2008 and 2011.
This next chart shows the price dispersion of individual MSCI EM stocks relative to their 200-day high. In essence, how many stocks are <10% from their 200-day high, how many are between 10-20% from their 200-day high, etc. When the black line, the percent of stocks that are more than 30% from their 200-day high, reaches the 60% level, as it did recently, that is a sign of extreme negative emotion towards EM stocks, and is usually consistent with a low in stock prices.
Similarly, this next chart shows the percent of MSCI EM stocks that are in a bear market. At its low of 86% on August 24th, the level of this indicator was similar to the level seen at the sentiment low of the 2011 selloff.
This final chart shows how far the average stock is from its 200-day high in price. The average MSCI EM stock was down 36% from its 200-day high on August 24th, which is a similar level seen at the 2011 emotional low.