This Week in Emerging Market Volatility – 12/27/2013

Once again the emerging market space tried to kick start a move to the upside this past week.  The iShares MSCI Emerging Markets ETF (EEM – 41.30) was up 2% and the iShares MSCI Brazil Capped ETF (EWZ – 44.69) was up almost 3%.  Both the respective volatility indexes dropped as well with VXEEM down about 5% and VXEWZ down almost 8%.  This time of year, when trading is slow and we are forced to take days off because the market is closed, I tend to focus more of the price action of the front month futures contracts.  The spot volatility index calculations are based on calendar days so holidays and weekends have a slight impact on the index changes.  The January VXEEM futures were actually off about 7.5% and the January VXEWZ futures lost over 8%.  This appears to be an indication that volatility players see higher stock prices in the emerging market space to begin 2014.  This led me to some more number crunching.

We have data on EEM going back to the middle of 2003.  I took a look to see if there is a January barometer for emerging market stocks based on performance of EEM.  For those that are not familiar with this Wall Street rule of thumb, there is a belief that the performance of the S&P 500 in January signals how the rest of the year will turn out.  For the S&P 500 the predictive power is stronger for a bullish January than a bearish January.  I took a look at each year from 2004 through 2013 to see if January performance signals anything for the rest of the year.  The table below shows the results.

EEM January Barometer

Of course 2013 has two more trading days, but barring a 4.5% rally we can assume that the February through December performance will be negative for EEM this year.  Of the 10 years on the table, four were positive in January and all four of those were positive for the rest of their respective years.  There were six negative January performances and three of those were followed by negative performance over the rest of the year.  Admittedly ten years of data is not overly significant, but so far EEM in January is 4 for 4 predicting bullish performance.

VXEEM VXEWZ