The Longer The Base, The Higher In Space

Emerging markets (EM) is one area we contine to like in 2018 as a place to pursue alpha. As we noted in our Outlook 2018: Return of the Business Cycle, this group has solid fundamentals, modest valuations, and an opportunistic demographic backdrop.

The country breakdown of the MSCI Emerging Markets Index shows that China is the largest component, followed by South Korea and Taiwan.

As we discussed yesterday, we view overall market participation as a sign that future gains are possible, and fortunately we are seeing that under the surface with EM.

Taking a look at the South Korean KOSPI (Korea Composite Stock Price Index) shows a solid technical backdrop. As you can see in our Chart of the Day, the KOSPI consolidated in a nice tight pattern for years before breaking out to the upside in 2017. With all the concerns and worries regarding North Korea, we find this to be an encouraging sign for the second-largest country component of EM and believe there to be potential for future gains.

Turning to the third-largest component country in EM, Taiwan has completed a picture-perfect saucer bottom* that lasted nearly two decades. There’s an old saying in technical analysis, “the longer the base, the higher in space.” Meaning the longer something consolidates, once it eventually breaks out, the move higher could be explosive. Well, the action in Taiwan fits this perfectly, and this is one country that may continue to see market strength.

When reflecting on this chart series, Senior Market Strategist Ryan Detrick explained, “We continue to favor EM, and after looking at the influential countries of South Korea and Taiwan, the underpinnings for the EM rally could very well have significant legs left.”

 

IMPORTANT DISCLOSURES

The Korea Composite Stock Price Index or KOSPI is the index of all common stocks traded on the Stock Market Division—previously, Korea Stock Exchange—of the Korea Exchange.

Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in this material may not develop as predicted.

All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. All performance referenced is historical and is no guarantee of future results.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

Technical Analysis is a methodology for evaluating securities based on statistics generated by market activity, such as past prices, volume and momentum, and is not intended to be used as the sole mechanism for trading decisions. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts and other tools to identify patterns and trends. Technical analysis carries inherent risk, chief amongst which is that past performance is not indicative of future results. Technical Analysis should be used in conjunction with Fundamental Analysis within the decision making process and shall include but not be limited to the following considerations: investment thesis, suitability, expected time horizon, and operational factors, such as trading costs are examples.

*A rounding or saucer bottom, is a long-term reversal pattern that signals a shift from a downward sloping to an upward sloping trend. This pattern historically lasts anywhere from several months to several years in duration. Due to the long-term look of these patterns and their components, the signal and timing of execution of these types of patterns tend to be difficult to identify than other reversal patterns.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

The investment products sold through LPL Financial are not insured deposits and are not FDIC/NCUA insured.  These products are not Bank/Credit Union obligations and are not endorsed, recommended or guaranteed by any Bank/Credit Union or any government agency.  The value of the investment may fluctuate, the return on the investment is not guaranteed, and loss of principal is possible.

Member FINRA/SIPC

For Public Use— Tracking # 1-722352 (Exp. 04/19)