Trader’s Narrative

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Man does not live by bread alone.

And neither is the US stock market the only market out there.

But we usually tend to act as if it was the only one that counts. One of the many lessons I learned from Weinstein’s excellent book: Secrets for Profiting in Bull and Bear Markets, is to monitor global indexes. Cheesy title, but excellent book - if you don’t have it, get it today.

This takes on extra importance at important inflection points - which are difficult to spot in the moment, as you’ve no doubt noticed. While the US market is probably the most important in the world, due to the interconnectedness of our world, it can not decouple from the rest. So by comparing it to the others, we can gain insight into bull and bear markets.

So with that in mind, below is a (not so random) walk through the world’s major stock markets. First, let’s take a look at the European exchanges, then Toronto and the South American Indexes and finally, Asia.

Since looking at so many charts can be dizzying, I’ll keep tabs on a couple of specific technical criteria. For example, the slope of the moving averages as well as whether price is uptrending or downtrending (making a higher high and a lower high or vice versa).

FTSE (England)

• made a new low in March 2009 (still downtrending)
• yet to break above January 2009 highs
• slope of 200 day moving average is down
• 50 day moving average is below price & climbing

CAC 40 (France)

• made a new low in March 2009 (still downtrending)
• yet to break above January 2009 highs
• slope of 200 day moving average is down
• 50 day moving average is below price & climbing

Continue reading ‘A Walk Through World Stock Markets’

We know what the US market is doing, shrugging off every single negative news and floating higher almost effortlessly. But what about the emerging markets?

One of the strongest emerging markets before the recent bear market was Brazil and it has come roaring back with a vengeance. If you think the recent gains, whether a bear market or the real thing, are impressive, then consider Brazil’s gains.

Similar to almost all world markets, the Bovespa started the last bull market in late 2002 and went almost non-stop until late May 2008. As a sign of the impressive relative strength, it shrugged off any signs of a top in October 2007 and went sideways as other markets around the world weakened and fell. Then in early May it surged to new highs, to then reverse and form a top.

Using simple Weinstein stage analysis, it was easy to see the trouble signs. But even after such a strong showing the index still fell 60%. It reached its low in October and in the following months, every single low was higher than the previous one.

While the US market struggled, falling lower still in March, Brazil was already trading 19% higher than its October 2008 low. As of today, it has made an astonishing 70% gain from the extreme low of last year.

I don’t know enough about the fundamentals to make a case but I imagine it would refer to the fact that the Brazilian banks were, for the most part, left unscathed by the financial mess that enveloped US and European banks. And also the turbo boost provided by Brazil’s commodity wealth can’t be ignored. They produce everything from soybeans to precious metals.

But all that can be encapsulated in the relative strength of BOVESPA to the S&P 500 index. It has already surpassed the previous high it set in 2008.

There are a few ETFs for the country:

• iSHARES Brazil ETF (EWZ)
• WisdomTree Dreyfus Brazilian Real Fund (BZF)

As well, there are many ADR’s like:

• Petrobras (PBR)
• Itau (ITU)
• Banco Bradesco (BBD)
• Brasil Telecom (BRP)
• Brasil Telecom (BTM)

While continued heady gains are improbable in the short term, a pull back would bring prices back to the 150 day moving average (in red) which is slowly flattening out. This would then provide a platform from which it can realistically challenge the previous highs.

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Talk about deleveraging. Markets all around the world are getting spanked. Brazil hit the circuit breakers after a 10% drop. Argentina’s MERVAL dropped 18%. Iceland is basically a very large crater by now.

But the real contagion that no one is talking about is the busting of the seaweed bubble:

No one has any idea what happened, eh?

Hmm… didn’t Alan Greenspan take a vacation in Indonesia recently?

With commodities in a bear market, having corrected sharply from just a few months ago, the white hot emerging markets which relied on them for their valuations, have stumbled badly.

Here is the Russian stock market:

Notice that a long term support line going back to 1999 has been decisively broken. The index is now trading at almost half of what it fetched in May 2008. This reminds me of the Chinese stock market - which has only gotten worse since the last time I featured it in gory detail.

Here is the long term chart of the Brasilian stock market, another heavily commodity dependent equity market:

Although BOVESPA has fared slightly better than the Russian stock market, it too has clearly broken its long term support line going back to 2002.

So what does this mean?
First, a snap back bear market rally is on cue and wouldn’t surprise most here. The nature of prices and markets does not allow for a relentless fall, nor a non-stop rise.

Second, this is yet another reminder of the cyclical nature of emerging markets. They are notorious for running from hot to cold and back again. Which can be great if you keep a disciplined approach and respect your stop losses.

Third, the consequences for the more developed markets is muted since they would only gain from an easing in inflation and reduced raw material costs. While the US markets have not been anything to write home about this year, they have held up much better than these markets. And with the cycle turning from real goods to “paper goods”, that outperformance can only continue.

Speaking of turtle trading (Way of the Turtle book review) and trend following, anyone noticed that the Mexican stock exchange has been on fire for the past few years? The chart looks beautiful with a gradual angle of ascent and very orderly pullbacks to support (200 day moving average):

If you look at a very long term chart (20+ years) you will see that this trend built a solid base from which to take off. The Mexican markets reached a peak in early 1994 and didn’t revisit that level until 2004! After basing just under the resistance level (~11,000) for a few months, they broke out in late 2004. And never looked back.

Until last year, Brazil (EWZ) was the strongest Latin market. Then it faltered and was overtaken by Mexico. Also notice how the relative strength of the Mexican market was extremely strong against the S&P 500. Even after each pullback the trendline of the relative strength was not broken. They were merely dips within a march upward.

So, is it too late to jump in? Well, considering that the base was 10 years in the making, a measured move would also last approximately 10 years. We’re in the 3rd year, so we have quite a ways to go yet. That being said, I wouldn’t just jump in headfirst. Wait for a pullback, especially to support levels or to a long term moving average (or sweeter still, the conjunction of both).

And if you’re a short term trader, put it up on your watchlist. It is almost in ‘free air’ territory again (meaning that every long is happy). We could have a breakout and long range day today if it breaks out of the mid-February resistance level.

Another way to play this is to not use the ETF (EWW) but to drill down to the components and find the strongest individual stocks and play those on the long side. The advantage is that you’ll get more beta for your bucks, but you’ll probably be stepping in much less liquid securities.