One area that has gone nowhere is the emerging markets in general. Essentially the growth has slowed a bit and there has been bad headline news like the implosion of Eike Batista but the market, as measured by the iShares MSCI Emerging Market Index ETF (EEM), is in pretty much the same place as it was a year ago. That was not always the case.
I have supplied a chart of implied volatility, historical volatility and stock price here. Besides the initial rally in the fall of 2012 the EEM mostly stayed put through the spring of 2013. Why? Money was moving to US Equities with the only real hiccup after the election. Both IV and HV traded for what I consider average levels. The EEM then went into a tailspin as large hedge funds started to delever oversees equities. It is the same trade that always gets folks in trouble, the "carry trade". Borrowing cheap in the USA and looking for return in the emerging markets totally came apart. Normally that kind of collapse in a big index is a large crowd getting out.
What traders can see is a very large rally on the back of growth in Emerging Markets lately. Essentially the fundamental story is starting to trump the residual effects of the massive exodus in the spring that left a lot of investors shaking their heads. The current rally has brought lower IV, but take note that IV levels are not back to where they were one year ago. When a market cannot get to lower implied volatility at the same price level that is still a caution sign.
That is where we find ourselves today. This next FOMC meeting should provide some clarity and I am looking for that lower IV. I think ultimately the EEM just gets back to even by the end of the year, think 2011 in the US Equity markets. The best play is waiting until the FOMC has come out and look for some out of the money spreads to sell, think Nov or Dec. If the IV starts coming in that should be a good sign the EEM is pricing on growth and not the vagaries of the Fed. The EEM should be back to even for the year after that.
OptionsProfits can be followed on Twitter at twitter.com/OptionsProfits
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV