PowerShares Emerging Markets Sovere (ETF) (PCY), iShares JPMorgan USD Emer Mkt Bnd Fd ETF (EMB): 2 Unusual Indicators Could Signal When the Market Will Turn

As these traders sell their emerging market bonds and convert those investments back into U.S. dollars, it is causing foreign currencies to drop. As these currencies drop in value, and as emerging market bonds sell off, traders still caught up in the original long emerging market bond trade have been forced to cover losing positions.

When these positions are leveraged (and they usually are with hedge funds), the race is on — and that means liquidating whatever holdings necessary to cover those losing positions. The result, of course, is a decline in the major domestic averages such as the S&P 500.

The bottom line here is that the unwinding out of emerging market debt is having a negative effect on U.S. stocks, as the so-called smart money runs for cover from emerging market debt losses. So, by watching closely the action in two bellwether emerging market debt funds — PowerShares Emerging Markets Sovere(ETF) (NYSEARCA:PCY) and iShares JPMorgan USD Emer Mkt Bnd Fd ETF (NYSEARCA:EMB) –we can get a good sense of where the U.S. equity market is heading.

Along with the pace of interest rates, the action in the emerging market debt market gives us two powerful tools by which to take this market’s temperature. So, before you go headlong and buy the current market dip, make sure you check yields on the 10-year Treasury note, as well as the action in PowerShares Emerging Markets Sovere(ETF) (NYSEARCA:PCY) and iShares JPMorgan USD Emer Mkt Bnd Fd ETF (NYSEARCA:EMB).

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