“Kill the Bulls”

Some bearish investors were looking for excuses to “kill the bulls”.

That’s what strategist Kenny Wen told Bloomberg in the wee hours of the morning as stocks in Hong Kong experienced their biggest one-day drop of 2017.

Hong Kong’s Hang Seng dropped 2% overnight. Leading the drop were some of the year’s biggest winners from the red-hot index, which was up more than 30% year-to-date before today’s slide.

It’s safe to say that the Hang Seng’s drop was an eerie way to kick off the 30th anniversary of Black Monday. And while a 2% slide isn’t anything close to a trend-breaker, we’re seeing a wave of red overtake the futures market in the western world right now. Heck, we might even see a legitimate pullback!

You see, Americans aren’t the only investors who have enjoyed historically calm market conditions this year. Emerging markets like China have also basked in a steady rally that has effectively lulled many investors to sleep.

Sure, U.S. stocks have been a great place for your trading dollars this year. But emerging markets are running laps around America’s major averages. That’s right – the same stocks that couldn’t attract any attention since the financial crisis are decimating U.S. stocks so far this year.

The iShares MSCI Emerging Markets ETF (NYSE:EEM) has rocketed to gains of more than 33% year-to-date. This performance puts all the U.S. major indexes to shame – even the red-hot Nasdaq Composite, which is up about 23% in 2017.

As we’ve mentioned many times recently, we’re experiencing a global economic rebound right now. But most of us are too fixated on what’s happening in the U.S. to see it unfold.

A quick peek overseas shows the strength of these emerging market rallies. India’s Nifty 50 Index is up 25% in 2017. Polish stocks are up more than 50%. Argentina is up a whopping 55% year-to-date. The list goes on and on…

While some investors are dipping their toes in emerging market funds, most folks are content to stay parked in U.S. stocks.

“U.S.-based stock investors may have pumped fresh funds into emerging markets after their recent outperformance, but they remain under-allocated by a key measure, as a combination of ‘home bias’ and lingering concern about volatility have restrained client interest,” Reuters notes.

That’s why we were so eager to jump into the iShares MSCI Emerging Markets ETF (NYSE:EEM) over the summer. EEM has doubled up the performance of the S&P 500 so far this year. This is a trend that has continued since we hopped onboard back in July. While the herd remains focused on the formidable FANNGs here in the states, the rest of the world is humming along at a pace we’ve not seen in a decade.

Up until the second quarter, U.S. money managers only had about 5% of assets allocated to emerging market stocks. Despite the incredible first-half performance of more than a handful of emerging markets, we didn’t see a big rush into these stocks like we witnessed during the Goldman’s BRIC-mania earlier this century. In fact, many of these countries continue to streak higher without a second glance from investors.

Meanwhile, futures remain stuck deep in the red as I type. The financial media are already stirring the pot because, like most investors, they’ve completely forgotten what an actual pullback looks like. Aside from Black Monday’s 30th anniversary, there hasn’t been any meaty market news lately. That means we’ll probably see plenty of ink spilled on today’s drop if it follows through.

Don’t get sucked into the madness. If we do see a meaningful drop, it will probably reveal more profitable trading setups for us to jump on in the coming weeks…


Greg Guenthner
for The Daily Reckoning

The Daily Reckoning