Emerging-market stocks fell for a third day after Moody’s Investors Service said it will review ratings for European countries and data from China to Brazil highlighted concerns about weakening growth. But another issue, from a technical analysis perspective, is at play. 

According to Bank of America, emerging market stocks’ relative strength chart to U.S. equities produced a “head and shoulders breakdown” pattern, a signal developing countries’ shares will continue to underperform next year. A head and shoulders pattern is formed by three consecutive peaks on a chart, the highest in the middle.
Via Bloomberg:
This is “the biggest risk we see for 2012,” the BofA analyst wrote, and “suggests emerging markets should significantly underperform the S&P; 500 as we enter 2012.”

The emerging market index has slumped 20 percent this year, compared with a loss of 1.7 percent in the S&P; 500, amid concern economic growth will slow from China to Brazil. The gauge for emerging-market stocks beat the U.S. index in nine of the past 10 years, on optimism that faster economic growth would bolster earnings for companies from China Mobile Ltd. to Petroleo Brasileiro SA.

Losing in 2012 would mark the first time since Russia’s default in 1998 that developing countries underperformed for two consecutive years, Bloomberg data show.
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