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Contributors Is the IMF Right? This Chart Has the Answer
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This week, the International Monetary Fund (IMF) made an anemic economic growth forecast. It cut its global growth forecasts for the second time since April and warned of a further slowdown unless the U.S. and European authorities take steps to fix their economic problems.

Is the IMF right?

I think emerging market (EM) stocks have the answer. They have underperformed U.S. stocks for a long time now. But, they should start outperforming domestic stocks if the global economy starts recovering.

So you can use the performance of emerging market stocks as a global economic indicator. If EM stocks are performing well, it’s a sign the global economy is improving. If they’re not, it means things aren’t getting any better.

That’s why I keep an eye on the chart of VWO, the Vanguard fund that tracks emerging markets. The daily chart below shows EM stocks are trading at a critical level.

A Breakout to the Upside Would Indicate the Beginning of a Global Recovery

See larger image

EM stocks have been rallying for the past few weeks. They’re trying to break above the downtrend line. This breakout would be a good sign for the global economy.

On the downside, VWO has lots of support around $40-$41. It has support from the 50 and 200-days moving averages and the red uptrend line. In other words, investors will most likely buy EM stocks if they fall towards that level.

And if VWO breaks below that level, it will find support again at $38. This is the last line of defense. If it breaks below that level, it will indicate the global economy is getting worse … even worse than the IMF expects.

Regards,

Evaldo Albuquerque
Senior Analyst

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