This Beaten-Down Sector is Ready for Its Next Big Rebound

There’s a lot of angst in the market right now, and considering the Dow has spent the past 14 trading days making triple-digit intraday price swings, it’s no surprise that traders are nervous.

Since early September, there’s been a big correction in many formerly high-flying market leaders. Domestically, the small-cap segment of the market has come down sharply, with the Russell 2000 sinking 9%.

In late September, I wrote about two inverse ETFs that can be used to take advantage of the breakdown in the small-cap segment.

Today, I’m recommending you take a different tactic when it comes to profiting from another beaten-down sector. That sector is emerging markets, and buying the latest dip could net you 15% profits in the next few months.

Like small caps, stocks pegged to the formerly high-flying emerging markets segment have come under heavy selling pressure since early September. 

A look at the chart of the benchmark ETF in the space, the iShares MSCI Emerging Markets (NYSE: EEM), shows the huge run from the February low through the September high. 

EEM Chart

The seven-month surge of nearly 24% was shattered in September, as traders ran for the exits. That selling sent EEM below its 50-day moving average early in the month, and by late September, shares had broken below key support at the 200-day moving average.

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One reason for the selling was profit taking, as traders who had enjoyed riding the emerging market wave locked in gains. Another key reason is the recent fear over slowing global economic growth.

There’s been a host of headlines over the past six weeks regarding downbeat outlooks for emerging markets such as Brazil and Russia. There have also been fears over slowdowns in more mature economies such as Japan, China and especially the euro zone nations. 

Those concerns were reflected on Tuesday with the latest global growth forecast from the International Monetary Fund (IMF). The IMF cut its 2015 global growth outlook and warned about the risks of rising geopolitical tensions and a financial market correction. The IMF said it expects the world’s economy will grow at a 3.8% pace next year, down from a July forecast that called for 4% growth in 2015.

So, with all of this pessimism about global growth, rising geopolitical tensions and the recent move out of EEM by traders, why is this a great time to get long emerging markets?

On the valuation front, EEM now trades at a P/E ratio of 12, well below the S&P 500’s P/E of 17. Emerging market equities also are trading at 1.5 times book value while developed markets are trading at approximately 2 times book value, according to analysts at BlackRock. If you are searching for discounts, emerging markets are a great place to shop.

The pullback in EEM is something I think will be viewed as a great entry price several months from now. This is precisely what happened in January, as EEM plunged 9% on fears that the bull market had run out of steam and that global growth was too slow to support the markets.

Well, we saw what happened between February and September, and I think that kind of rebound could easily happen again. 

When the market settles, and when the smart money gets back in, it will seek bargains such as EEM — and that’s why now is the time to start building your position.

Recommended Trade Setup: 

— Buy EEM at the market price
— Set stop-loss 8% below entry price
— Set initial price target at $47.50 for a potential 15% gain in three months

Note: There is a proprietary stock market indicator that’s never been revealed to the general public. In just six months, it tagged 71 stocks right before they jumped 10% in two weeks. And it’s tagged 21 stocks right before they jumped 20%. To see how it does it — and to get the name of a stock flashing “buy” right now — click here.