Selling The Brazilian Bull, For Now...

When I woke up this morning to the Russian stock market crashing to new lows (lower than its October low of 549 on the RTSI), I immediately moved to run the risk management math on our position in Brazil (the EWZ etf). While I don’t believe in the nonsensical Wall Street acronym BRIC (Brazil, Russia, Chindia), I very much believe that when my intermediate “Trend” line breaks that an asset can begin to fall like a brick.

That’s my math and I am sticking to it. The reality is that the Bovespa (see chart) finished off a massive +44% move on January the 6th, right after the US stock market locked in its 3-month cycle high up at 941. While the Bovespa’s recent correction has been about the same as that in the SP500, this only means that it has further to fall if mean reversion has any place in the risk management side of the argument.

No, I am not selling Brazil because I don’t think they will cut rates. No, I am not selling Brazil because I don’t think that it will continue to outgrow the rest of Latin America in 2009. I am selling Brazil today, because the Bovespa index broke a critical level in my model at 38,787.

Keith R. McCullough
CEO & Chief Investment Officer

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