Talking Numbers

One of the best trades of the last three months may be in trouble

One of the best trades of the last three months may be in trouble

Emerging markets have been one of the hottest trades for the past several months. Over the last three months, $100 billion was invested in emerging markets—$45 billion in May alone, according to the Institute of International Finance.

Since the start of March, the iShares ETF tracking the MSCI Emerging Market index (EEM) is up 10 percent. That compares quite favorable to the U.S. benchmark S&P 500 index, which is up 4 percent during the period.

But could the rally be too much of a good thing?

Gina Sanchez, founder of Chantico Global, thinks now is a good time for investors to cash in their gains in emerging markets.

"At the beginning of the year, they were incredibly cheap," Sanchez said about emerging market stocks. "Now they've actually caught up to those valuations."

While she sees them as being cheaper than U.S. and European stocks on a relative basis, Sanchez expects problems.

"We saw some bad housing numbers out of China," said Sanchez, a CNBC contributor. "Home sales out of China are definitely going to hit emerging market sentiment. So, there are reasons that you might start to look to take your money out."

Richard Ross, global technical strategist at Auerbach Grayson, believes the charts on the EEM give reason to not be in the ETF.

"I remain skeptical," said Ross, a "Talking Numbers" contributor. "I've missed largely this big move that we've had off the bottom, but that doesn't mean we compound matters by chasing when we're into key resistance that goes back many years."

Ross' one-year chart of the EEM shows resistance around $44 per share, around its May 2013 highs. It subsequently made a double bottom at around the $37 level over the course of the following several months. The ETF closed at $43.42 on Tuesday.

"We failed here last year," Ross said. "I think we fail here once again despite the presence of that nice bullish double bottom. I think we see better support down around the $40 level."

The longer-term chart of the EEM shows worse problems, said Ross. He sees a "distributive top" over the past five years. "It means that it's being sold here," explained Ross. "Even though we've had these furious rallies and sharp pullbacks, the pattern over time is one of distribution, which means investors are selling."

Ross notes the EEM has underperformed the developed markets over the past several years. Since the start of 2011, the S&P 500 is up more than 50 percent while the EEM is down 10 percent. And with global central banks continuing to reduce their monetary easing, that could hurt emerging markets as well.

"You want to take advantage of these rallies to be a seller here," said Ross. "Trim your exposure. The currencies have been a tailwind, [as in] they have been strengthening. Just recently, we're starting to see those trends reverse. Some of those currencies like the Turkish lira and the Indian rupee starting to weaken once again. That could provide a headwind."

"With the market into this key resistance," added Ross, "that's not where you want to be a buyer."

To see the full discussion on emerging markets and the EEM, with Sanchez on the fundamentals and Ross on the technicals, watch the above video.

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