Friday, September 12, 2008

Brazil Finding a Bottom?

As I noted yesterday in The U.S. VIX vs. a BRIC VIX, emerging markets have been struggling mightily in the past few months.

An excellent example of the weakness in emerging markets can be found in Brazil, where the Brazil country ETF (EWZ) fell 44.3% from a late May high to a low that was made yesterday. Now picking bottoms is a game best suited for those who are long on hubris and short on common sense, but there are several factors which lead me to believe that yesterday’s low may turn out to be an intermediate or long-term bottom.

From a purely technical perspective, the chart below shows Tuesday as the lowest close (omitted is the intra-day 52 week low from yesterday). Also on Tuesday, EWZ’s options volume hit a new high for 2008 and implied volatility spiked to levels not seen since the March panic. Of course, none of these factors guarantees a bottom, but taken together, and given the relative strength of EWZ once again today (up over 4% as I type this), they increase the likelihood of a profitable entry.

[source: International Securities Exchange]

[Disclosure: long EWZ at time of writing]

8 comments:

Damian said...

Bill - what is the site you're showing there? In other words, where does the screen shot come from?

Bill Luby said...

Hi Damian,

The graphic comes from the International Securities Exchange: ise.com

Cheers,

-Bill

Anonymous said...

Love those Brazilian Bottoms... sorry, couldn't help myself.

Anonymous said...

Does this volatility have any correlation to commodities stocks in the US and/or the rest of the world?

Anonymous said...

Hey Bobo,

[Disclosure: long EWZ at time of writing]

You know in ancient Greece, hubris referred to actions which, intentionally or not, shamed and humiliated the victim. lol...poke,poke

Let's get some more of these charts to turn up as well.

Best to your weekend,
snap

Anonymous said...

I went to ise.com and tried this for the EWC and EWA.

Very interesting. thank you.

Tom D said...

Bill, Your comment on the 11th is very much the issue at this juncture:

"If emerging markets are the buffer whose continued growth is supposed to buttress developed markets in this economic slowdown, then emerging markets need to find their own firm ground and soothe anxious investors before they can be expected to lubricate the wheels of the global economy."

The myth of decoupling from the US and the myth of continuous emerging country ascendance are both exploding as the BRICs are mostly all are down double the US markets losses.

Several months ago I wrote this about bonds http://twocents.blogs.com/weblog/2008/07/bonds-galore-and-more.html
Also I recommended reading James Montier's and Albert Edwards'--both at Societe Generale) interview with Kate Welling. It's a bit of a circuitous route to get to it: go here first:

http://www.investorsinsight.com/blogs/john_mauldins_outside_the_box/archive/2008/07/14/inflation-is-not-the-problem.aspx

Then click through to the Investment Postcards site, and finally to Welling@Weeden.

I have just re-read the interview titled "Inflation Not The Problem". Given what's happened in two months it's an even geater shock to me than it was then. It covers the gamut but puts the emerging markets and commodities (synonymous in my view) into true perspective.

Given all of the above I've become much more bearish on both US and emerging markets as well as commodities after being in denial. Rallies happen of course, and I am playing one in silver just now, but I'm concerned.

Bill Luby said...

Good comments, all.

Regarding volatility in the Brazilian ETF, yes it is correlated to (volatility in) commodities stocks.

As for the comments by Tom D., I encourage everyone to check out his excellent blog, Putting the Pieces Together

Finally, with respect to hubris, I'm glad someone else found some humor/irony in my utter disregard for the true meaning of the word, which, if I recall correctly, has more to do with an underlying character flaw in the individual than specific random or non-random consequences of the decisions he or she makes.

Hubris is surely an expensive trait for the trader/investor to cultivate.

Cheers and good trading,

-Bill

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