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Emerging markets crushing S&P, but strategists say stay away

Watching emerging markets

After a rocky stock, 2016 has turned into a rather nice year for U.S. stocks. But the emerging markets are doing even better.

The popular emerging markets-tracking ETF (EEM) has risen more than 12 percent this year, performing twice as well as the . But Eddy Elfenbein, editor of the Crossing Wall Street blog, says it's a good time to "take some profits off the table."

He's still concerned about the Federal Reserve potentially raising rates and also slowing growth in China. "I'm also very concerned about oil, which has been falling in recent days, and many of the emerging markets are heavily dependent on commodities," he said.

A major commodities bounce, a mitigation of China concerns and reduced expectations around the Fed's rate-hiking schedule have helped the EEM bounce off of its lows. But the gains associated with a moderating dollar aren't set to continue, according to Elfenbein.

"Emerging markets are very much driven by the dollar, when the dollar is strong that's like a magnet, it just pulls all the money," Elfenbein said Wednesday on CNBC's "Power Lunch." "Remember, we were going to have those four rate increases, that was going to help the dollar, that never materialized and that was a green light for people to go back into the emerging markets."

The EEM's exposure is about 25 percent to China, 15 percent to South Korea, 12 percent to Taiwan and 8 percent to India.

Interestingly, it's some of the smaller emerging markets that have done best this year. A change in political leadership in Brazil and Argentina sent their markets up more than 30 percent. In Russia, stocks have gone higher as a result of oil coming off its lows. In Asia, the best-performing market is Indonesia where shares are up 17 percent. Indonesian President Joko Widodo is seen as a pro-business leader who will spur economic reform, boosting investor confidence.

In the options market, investors as a whole appear to be placing bullish bet on emerging markets.

Susquehanna's head of derivative strategy, Stacey Gilbert, who was also appearing on "Power Lunch," said that options sentiment around the EEM is such that investors are "protecting a little bit [but] willing to get in [if the EEM is] more down 10 percent. Overall, I think people like emerging markets."