When markets trade in a range - it is the perception of fundamentals in the future that drive the price from one end of the range towards the other end of the range. When people are too pessimistic, stocks move towards the lower end of the range and when people turn little optimistic, then stocks move towards the higher end of the range.
Nothing really changes on the ground except HOPE and positioning of the market participants.
Here's MSCI EEM Chart (Emerging market index)
As you can see in the chart above: MSCI EEM has not crossed 45 since 2008. Though it has rallied 3 times to that level in last 7 years. The other thing it has done - MSCI EEM has always found support at 30. This time again - EEM is rallying from 30 and right now is at 35. It can easily rally to 45 i.e. another 30% purely on HOPE. But markets do not breakout on HOPE. The Breakout above 45 will signify real change in fundamentals but bouncing between 30 and 45 can happen purely on emotions and Hope.
Please note - I am suggesting EEM can rally 30% and not it will rally 30%. All I am saying - when markets trade in a range - it can move from one end to another purely on HOPE and Value call. Remember - the MSCI Emerging Market Index is trading at a PE multiple of just 11.3x
Never miss the flow: Capital flows into emerging markets reached a 21-month high in March, totaling $36.8 billion
Disclaimer – The state of the market notes is Deepak’s perspective on the market. The column is purely for educational purpose. Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. By reading this publication you agree to make no trade relying in whole or in part on the comments of the writers