In general, World Equity markets have been grinding consistently higher since October with very little volatility. In the past week or so this has changed as many Indexes in Asia, particularly China’s Shanghai Composite, have endured some real structural damage. While the recent pullback is being attributed to the onslaught of negative headlines related to the Coronavirus, this was also a very logical place for markets to pull back as many of our price targets were being achieved and resistance levels tested in major indexes both in the US and Internationally.
Since the brunt of the damage was felt in Asia let’s look at what is going on in this region and what it could mean for World Equities, particularly Emerging Markets ($EEM). China ($FXI), South Korea ($EWY) and Taiwan ($EWT) drive much of the price action in EEM as the 3 countries make up nearly 60% of the index. China and South Korea have lagged relative to the region and the US for several years, so it was no surprise to see the Shanghai Composite and Kospi 200 Indexes break down this week after failing to hold above their 2019 highs.
In line with our top-down approach we always want to follow the leaders and analyze their price behavior for insight into the broader market. The leader in Asia has been Taiwan for some time now, due to their heavy exposure to Semiconductors. While the MSCI Taiwan Index just recorded its first all-time high in about 20-years, most other Asian countries are rangebound and trapped below significant overhead supply.
Here is the chart, zoomed all the way out to its dot-com bubble highs in 2000. This is no longer something we want to be buying as risk has shifted to the downside following a failed breakout in price at a key resistance level.
Things don’t look any better for the Taiwan iShares ETF, EWT, which just pierced below its record highs from 2018 and 2019 with momentum hitting oversold. Although prices are still sitting slightly above their key highs from 2000, this level looks likely to break next as it just did in the MSCI Taiwan Index.
So what does it tell you if we no longer want to be buying one of the strongest markets in Asia? If we’re expecting the region’s leader to consolidate or correct through time or price, that’s not an environment where China, South Korea or Emerging Market or Asian-Pacific Equities more broadly are likely to perform well either.
I hope you enjoyed this post! As always, reach out to me at Strazza@thechartreport.com with any questions or comments.