A trader works on the floor of the New York Stock Exchange (NYSE) in New York, U.S.(Photographer: Michael Nagle/Bloomberg)

Red Hot Emerging-Market Stocks Are Showing Signs of Overheating

(Bloomberg) -- The scorching gains that have put emerging-market equities on track for their best year since 2009 are showing signs of flagging.

After the MSCI Emerging Market Index’s surge of about 17 percent this year, momentum indicators suggest the rally is losing steam. The benchmark is approaching a resistance level formed by the trend line connecting the peaks in 2011, 2014 and 2015. While breaking above it would be a bullish omen, other technical signals also point to some overheating.

The MSCI EM’s 14-week relative strength index has surged to 74, a level not seen since 2009. The shorter-term 14-day RSI is also above 70, the threshold for overbought conditions. The benchmark climbed for six straight sessions through Monday.

“The speed of the rally has been very impressive, and investors might need a breather, even if the long-term trend remains pretty bullish,” Andrea Tueni, a trader at Saxo Bank in Paris, said by phone. “The index is now getting into a strong resistance zone with the descending trend line and also the 2014 and 2015 highs. These levels won’t be easy to break.”

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