Stocks slipped every day last week, capped by a weak jobless claims report and a tepid revenue outlook from Dow component Cisco (NASDAQ: CSCO). But while closing numbers suggest more weakness, the real story was just beneath the surface.
Market breadth greatly improved over Wednesday’s washout session. Instead of all 30 Dow components moving lower Thursday, which is a rare event, only 19 moved lower.
Industrial metals also caught a bid, with the iPath Copper (NYSE: JJC) rising 1%. Remember that copper has been acting as a leading indicator for the stock market lately.
Of course, we expect the bulls to mount a charge here soon given that 90% downside days like Wednesday — in which down volume accounts for more than 90% of total volume — are typically followed by a rally of two to five days in length.
If that fails to materialize, or if it’s of questionable strength, then it will be clear the balance of power has shifted back to the bears. For now, it looks like a bounce is coming with the next few days — and may have already started with the S&P 500 back in positive territory in mid-day trading on Friday.
My scans suggest that emerging market stocks are preparing to lead the way higher.
Emerging market shares were one of the few areas of the market that didn’t see large investor outflows last week. According to fund flow data from EPFR, while nearly $4 billion was pulled out of U.S. equity funds, a fresh $1.6 billion slowed into emerging market funds. This has helped keep emerging market stocks buoyant: Indeed, the iShares Emerging Markets (NYSE: EEM) remains comfortably in its four-month uptrend despite all volatility of the past week. In comparison, the U.S. small cap stocks in the Russell 2000 continue to flirt with their June and July lows.
Investors seem to be focusing on Asia ex-Japan as well as emerging Europe, the Middle East, and Africa. More specific plays include the iShares MSCI Pacific Ex-Japan (NYSE: EPP), the Malaysia iShares (NYSE: EWM), South Korea iShares (NYSE: EWY), and the Market Vectors Vietnam (NYSE:VNM).
Be sure to check out Anthony Mirhaydari’s new advisory service, the Edge, which will be launched in September. He can be contacted at anthony.mirhaydari@live.com.
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