#$ewy

Amid geopolitical turmoil, the South Korean Kospi just hit a new all-time high.

If one was using news headlines in order to direct their investment decisions, South Korea would probably be one of the last options on their list. Given the tantrum currently being thrown in North Korea, intuition might suggest that the stock market in South Korea would be on edge -- or off the edge. It would almost certainly not suggest that Korean stocks are in the midst of a sharp rally that has taken them to new all-time highs for the first time in 6 years. Yet, that is reality.

Back on January 13, we noted that South Korea’s main stock index, the Kospi, had surmounted key resistance near the 2050 level. As we stated, with “...serious resistance near 2050 cleared, a potential path to its April 2015 highs near 2170 is not unreasonable.” Within 2 months, the Kospi had indeed reached that 2170 level. And after a month-long digestion near that level, the Kospi would do one better, hitting an all-time high today of 2241.

The U.S. stock market is 8 years into a cyclical bull market, spending the latter half of that period as just about the only game in the global equity town. Thus, we have been suggesting to investors recently, and often, that they may want to keep an open mind about more international exposure in their equity portfolio. This mindset has been supported by the fact that we’ve seen countless positive technical developments in markets around the globe thus far in 2017.

South Korea is no exception. And if the Kospi can move to new highs decisively, and hold there, the South Korean market may have just about as much upside potential as any market.

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Emerging markets have been a real laggard. While developed markets around the world have been making new highs, it’s just now that emerging markets are catching up. This week the MSCI Emerging Markets Index Fund $EEM broke out to the highest level since the summer of 2015. This comes after 7 months of sideways consolidation:

Emerging Markets $EEM

I think this breakout is for real and we want to be long if EEM is above $38 with a target above $44 which was the high back in the Spring of 2015. The leader here is South Korea, which represents the largest component of the Emerging Markets Fund. $EWY, the South Korea Index Fund, is also breaking out to new 52-week highs this week:

South Korea $EWY

Notice how South Korea is not just hitting new highs, but is also resolving higher above a downtrend line from those 2014 highs. We want to be buying weakness in both South Korea and emerging markets as a group. If EWY is above $59, we want to err on the long side with a target back up towards those 2014 highs above $67.

Emerging Markets are hitting new 52-week highs. This is not something we usually see in downtrends.

  After successfully holding key support a few months ago, South Korea’s KOSPI Index is breaking out.

  Back on November 19, we posted a piece titled “Will South Korean Test Be A Red Flag For Global Markets?. The crux was that Korea’s main stock index, the KOSPI, was testing key long-term support. And given some folks’ characterization of South Korea as a global economic bellwether, we suggested that the result of the test, good or bad, may have ramifications for the global market. As it turns out, the KOSPI was successful in holding the key support and has been on an upswing ever since.

Now we are not going to try to ascribe this successful test as the overriding factor in the global sock rally since then (a certain election and trader positioning around it may have played a small role as well). However, most markets around the globe have experienced solid advances in the past 6-8 weeks. Included among them, as we mentioned, is the South Korean KOSPI. And, in fact, in the past few days the index has broken out above an important cluster of resistance near the 2050 level – and in convincing fashion.

    The resistance near the 2050 area included:

The Post-2015 Down trendline, and

The 61.8% Fibonacci Retracement of the April-August 2015 decline

This breakout should open up considerably more upside for the KOSPI. The 78.6% Fibonacci Retracement of the April-August 2015 decline, near the 2100 level, may offer some resistance. However, with the more serious resistance near 2050 cleared, a potential path to its April 2015 highs near 2170 is not unreasonable – if the breakout is successful.

Of course, that last caveat is always “the catch”. If we’ve learned anything from global markets in the last half decade or so, it is that they’ve demonstrated a considerable proclivity for false breakouts and breakdowns. Therefore, when approaching breakouts, one should do so with a “trust but verify” attitude…or, perhaps, “don’t trust but verify”.

That said, we have witnessed more than a handful of successful breakouts over the past few months, e.g., banks, FTSE-100, etc., so perhaps that is more reason to resist dismissing this breakout.

For U.S. investors, a better reason to dismiss it, as always, is the difficulty in identifying a reliable vehicle in which to exploit the move. Domestic ETF’s, like the iShares MSCI South Korea Fund (ticker, EWY), have their well-documented shortfalls, including poorly representative baskets of stocks and, most importantly, adverse currency effects. Adverse doesn’t necessarily mean the currency adjustment is working against the U.S. investor, just that it typically works against the directional bias of the local country index. And with the strong U.S. Dollar in recent years, that has meant considerable headwinds for most international equity ETF’s.

That aside, as it pertains directly to the South Korean KOSPI itself, the recent, convincing breakout should open up immediate and considerable room to the upside.

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More from Dana Lyons, JLFMI and My401kPro.

The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.

South Korea, long viewed as a global bellwether, is seeing its stock market testing major long-term support presently.

South Korea has long been considered a bellwether of sorts for the global economy. This is due to a heavy cyclical component to the Korean economy. Now whether or not that distinction is accurate is up for debate. However, if its stock market is a fair barometer of the economy -- also up for debate -- its performance over the past decade may lend credence to the global bellwether argument. That’s because, while many other global equity markets have broken out to new highs in recent years, South Korea’s main KOSPI Index has been veritable dead money since peaking in 2007. Its sideways performance since has essentially mirrored the lackluster global economy.

In fact, the KOSPI’s high in 2007 was 2064. Its high in 2016, so far, is 2068. And only twice briefly in the past 9 years -- in spring 2011 and spring 2015 -- did the index surpass those levels. Now it can be argued that the KOSPI is merely building a huge base prior to it eventual breakout and leg higher. Its post-2007 chart pattern does resemble a potential ascending triangle, with higher lows and its horizontal highs. However, the KOSPI better hurry up and break out soon. That’s because it is once again testing the lower support of the potential ascending triangle. This lower bound is represented by an uptrend line that defines its rally since the lows in 2003.

Now, the KOSPI did make a more prominent low in 1998. However, what makes this post-2003 trendline (on a log scale) compelling is that it connects the lows in 2008 and the lows in February and June of this year. The KOSPI is now, once again, testing this defining 13-year Up trendline, near the 1960 level.

We have said often in the past that the more frequent that prices test a trendline, or other support, the more likely it becomes that the line will fail. That’s the challenge now with the KOSPI. After 1 touch in the prior 11 years, the index is now testing the trendline for the 3rd time this year. But if the KOSPI can hold the line, it can make another run at its former highs, some 10% higher. A break below the line, though, could usher in some heavy selling pressure, with our first major potential support level some 10% to the downside. 

Either way, if South Korea is indeed an accurate global bellwether, and if the KOSPI is an accurate barometer of Korea’s economic well-being, this trendline test could be a key marker for the global economy.

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More from Dana Lyons, JLFMI and My401kPro.

CLICK HERE TO ENLARGE CHART ABOVE

Emerging markets ETF EEM doesn't have much to brag about since 2007, as its down 30% from its highs

It doesn't have much to brag about the past three years either as its at the same price as it was in 2012, while so many market are much higher than 2012.

EEM is testing sideways channel support at (1) above. So far its been a good place to buy EEM on this support line. Will it be different this time?

If channel support would happen to give way, Emerging markets could turn into "Sub-merging" markets, as frustrated owners of the ETF could ramp up selling of shares.

Big test in play friends!!!

On December 6, we pointed out a potential “bear flag” in the chart of South Korea’s main stock average, the KOSPI Index. As the name implies, this is a bearish pattern that typically results in lower prices. In this case, the bear flag was about 6 weeks in the making and therefore most relevant on a shorter-term duration. This is what we wrote regarding the risk suggested by the bear flag pattern:

Should the bear flag implications pan out, the first target would be a retest of the October lows just below 1900. An undercut of that area would not be a surprise and the Index would quickly hit the up trendline connecting the 2010, 2011 and 2013 lows, currently around 1870. That may provide a springboard for a better bounce.

Well, it certainly isn’t always the case, but sometimes prices actually do what they’re supposed to do. In this instance, the prior day’s close in the KOSPI marked THE top in the short-term as the potential risk suggested by the bear flag began to manifest itself immediately. Just 6 days later, the KOSPI had sold off by nearly 5%, bottoming right at the first target at 1899. After a few days worth of a bounce, the KOSPI did undercut the October lows and approached the upward sloping long-term trendline that we mentioned. After bouncing again for a few days, the index returned to test those lows, bottoming in early January right on that trendline around 1876. Subsequently, the “springboard” indeed engaged.

In the 3 months since, the KOSPI has been on fire, gaining some 14% over that time. And importantly, last week the index broke out above its highs of last August to a nearly 4-year high.

As the chart illustrates, the breakout level in the mid to upper-2000′s had served as resistance since 2012. Furthermore, the KOSPI’s high in 2007 was formed right at the same level. therefore, this was a significant hurdle to overcome. The obvious catch is that the 2011 all-time highs await about 4% above current levels. Naturally, that should serve as some stiff resistance, particularly if the index should rally immediately up to that level. After closing higher for 12 of 13 days (the one loss was -0.019%) and 13 of 15 weeks, the index could use a breather. It is doubtful that the KOSPI would be successful in breaking its all-time highs without one. Therefore, some consolidation perhaps up near those highs could allow the index to join several of its Asian counterparts in record territory.

Speaking of other Asian markets, the table below reveals just how dramatic the KOSPI’s reversal of fortune has been in the months since our “bear flag” post. 

While other Asian markets were breaking out in the middle to late 2014 (e.g., China, Japan, India), South Korea was bringing up the rear in relative performance. Since bottoming in January, however, its fortunes have changed. Only the China Shanghai Composite is up by more than the KOSPI over the past 3 months (at +33%, how could it not be?). The KOSPI has even surpassed some of the smaller Asian markets (e.g., Indonesia and the Philippines) whose breakouts we highlighted earlier in the year.

With several Asian equity markets exhibiting high-profile rallies -- China, Hong Kong and Japan, in particular -- the move in South Korean stocks the past 3 months has flown under the radar. However, the Korean KOSPI index was able to achieve a significant milestone last week in breaking out to near 4-year highs. And though the index may be a little overheated in the short-term, its all-time highs set in 2011 are within striking distance. Once the China equity fervor dies down a bit, more eyes, and money, may turn to South Korea. Such a turn may be enhanced or expedited given perhaps some relative monetary leeway on the part of the Bank of Korea should they look at the party in Asian equities and say, “we want in”.

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"Seoul” photo by Clint Sharp.

More from Dana Lyons, JLFMI and My401kPro.

This chart takes a look at the Shanghai Index over the past couple of decades. As you can see, this index remains inside of a well defined rising channel over the past 20-years.

From 2007 to 2014 this index had little to brag about, as it lost about two-thirds of its value in that time frame. The large decline took the index from the top of this channel (resistance) to bottom of this channel (support) in a 5-year time frame. The index broke above a 4-year falling channel on a breakout above line (1).

Click HERE to enlarge chart above

Two different resistance lines came into play at (2). The Shanghai index paused at this resistance for 2 months before breaking out at (2).

Earlier in the week the Power of the Pattern shared the 6-pack below, reflecting that several ratios involving this region of the world were breaking down. See post HERE

Click here to enlarge chart above

Five of these six charts are ratios. When the ratios are moving up, the S&P 500 is stronger compared to each of these ETF's. The upper left chart (SPX/FXI ratio) is breaking support, which reflects that China is reflecting relative strength against the S&P 500 that we haven't seen in the past 5-years.  As you can see, several of these ratios are working on breaking support, reflecting strength of the ETF over the S&P 500.

The lower right chart reflects a breakout of CQQQ, from its bullish ascending triangle pattern. 

Full Disclosure- Conservative members own the Long FXI/Short SPX pair trade and aggressive members own FXI.