Emerging Markets: Time to Short? (EEV, EEM)

The Talking Heads are yacking about how Emerging Markets have come to far in a short amount of time, thus, hit the Cash Out button.  Your weapons of choice?  Long the ProShares UltraShrt Mrkt (ETF)(NYSE:EEV) and Short the iShares MSCI Emerging Markets Indx (ETF)(NYSE:EEM).

The 2008 Emerging Economy Report defines emerging markets as “regions of the world that are experiencing rapid informationalization under conditions of limited or partial industrialization.“  The term was originally invented by Antoine van Agtmael to provide a more accurate (and less offensive) replacement to the term “Third-world nation.”  Today, the most prominent emerging market nations are far from being “third world” anymore, with some quickly approaching the status of “developed” or “first world.” (More at Emering markets - Wikipedia)

Developed nations (pink) vs. Emerging markets

EEM is an exchange traded fund that tracks the MSCI Emerging Market Index. The MSCI Emerging Market Index invests in stocks in global emerging markets such as Russia, India and China. As we all know, the Chinese, Indian and Russian stock markets have recovered ahead of the US stock market with the Shanghai Composite Index gaining over 40%, the Bombay SENSEX gaining over 50% and the Russian RTS Index gaining over 70%. In fact, EEM has received favorable coverage almost every day of last week.

On the technical front, EEM has been rallying atop a rising 50 day moving average and broke its 200 day moving average decisively earlier this month. It certainly is in a strong intermediate bull trend but is now coming up against its 200 period weekly moving average and 50 period monthly moving average which should provide significant resistance. Volume is also not following into this rally very much, which casts doubt on EEM’s ability to make a resolute breakout of these resistance levels without a pullback. Indeed, EEM sure looks like it is overdue for a pullback but as the old adage goes, the market can stay irrational longer than you can stay solvent.  

Taking a look at the iShares MSCI Emerging Markets Indx (ETF) (NYSE:EEM) Puts for June, the activity is out of control in the $30 to $34 Strikes, including 18,000+ at the $34 Put:

Strike Symbol Last Chg Bid Ask Vol Open Int 5.00 MBYRA.X 0.03 0.00 N/A 0.02 0 1,226 6.00 MBYRF.X 0.07 0.00 N/A 0.02 0 299 7.00 MBYRG.X 0.12 0.00 N/A 0.02 0 216 8.00 MBYRH.X 0.03 0.00 N/A 0.02 0 116 9.00 MBYRI.X 0.03 0.00 N/A 0.02 0 20 10.00 MBYRJ.X 0.02 0.00 N/A 0.02 0 1,104 11.00 MBYRK.X 0.05 0.00 N/A 0.02 0 624 12.00 MBYRL.X 0.03 0.00 N/A 0.02 0 478 13.00 MBYRM.X 0.02 0.00 N/A 0.02 0 758 14.00 MBYRN.X 0.02 0.00 N/A 0.02 140 14,611 15.00 MBYRO.X 0.02 0.00 N/A 0.02 120 34,297 16.00 MBYRP.X 0.06 0.00 N/A 0.02 27 2,504 17.00 MBYRQ.X 0.04 0.00 N/A 0.02 48 3,070 18.00 MBYRR.X 0.03 0.00 N/A 0.02 2 88,646 19.00 MBYRS.X 0.02 0.00 N/A 0.02 1 21,548 20.00 MBYRT.X 0.01 0.00 N/A 0.03 50 101,648 21.00 MBYRU.X 0.04 0.00 N/A 0.04 1 34,692 22.00 MBYRV.X 0.03 0.00 N/A 0.05 9 36,029 23.00 MBYRW.X 0.03 0.00 0.02 0.05 25 53,671 24.00 MBYRX.X 0.04 0.01 0.04 0.05 18 101,716 25.00 EEMRY.X 0.03 0.02 0.03 0.06 1 83,445 26.00 EEMRX.X 0.05 0.00 0.05 0.08 35 64,726 27.00 EEMRE.X 0.08 0.00 0.07 0.10 422 89,052 28.00 EEMRH.X 0.12 0.02 0.11 0.13 29 74,880 29.00 EEMRC.X 0.17 0.03 0.16 0.18 282 44,389 30.00 EEMRF.X 0.25 0.05 0.24 0.26 7,479 82,788 31.00 EEMRA.X 0.37 0.08 0.36 0.38 8,468 57,616 32.00 EEMRB.X 0.55 0.13 0.54 0.56 1,647 69,000 33.00 EEMRZ.X 0.81 0.21 0.82 0.84 5,806 11,750 34.00 EEMRD.X 1.21 0.29 1.21 1.23 18,753 12,214 35.00 EEMRI.X 1.76 0.36 1.74 1.76 1,974 1,389 36.00 EEMRJ.X 2.35 0.36 2.40 2.43 128 797 37.00 EEMRK.X 2.89 0.17 3.15 3.25 4 356 38.00 EEMRL.X 3.50 0.00 4.05 4.15 44 308 39.00 EEMRM.X 4.35 0.00 5.00 5.10 18 339 40.00 EEMRN.X 5.25 0.00 5.95 6.05 11 258 41.00 EEMRO.X 9.25 0.00 6.95 7.05 15 90 43.00 EEMRQ.X 17.90 0.00 8.90 9.05 0 31 44.00 EEMRR.X 18.80 0.00 9.85 10.05 0 121 45.00 EEMRS.X 13.17 0.00 10.75 11.05 2 68

SOURCE: http://www.ibtimes.com/articles/20090531/ishares-msci-emerging-markets-index-eem-call-ratio-spread.htm