Trader’s Narrative

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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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.