Time for a Brazilian Lift?
With a burst of 1% daily moves over the past month, investors have gotten a sudden dose of volatility in the U.S. stock market. However, if you really want volatility, you should see what’s going on in the Brazilian Bovespa Stock Index. Since the beginning of September, there have been no less than 7 daily moves of 3% and 3 moves over 4%. That is more than the last 3 years combined. While we are always hesitant to assign causes to market moves (because, why does it matter?), in this case it is clear that the upcoming presidential election run-off is having an impact. Unfortunately for investors there, the impact has mostly been negative, with the Bovespa down about 15% since August. However, with volatility comes opportunity.
Looking at the market from a couple different angles, the Bovespa appears poised for at least a short-term lift. First, from a price perspective, the sell off has brought the index near a key level now. We have mentioned before that the lows last year and earlier this year came at a crucial spot, namely the 61.8% Fibonacci Retracement of the 2009-2010 rally. The subsequent bounce off the double bottom broke the downward momentum since at least the 2012 high as the Bovespa moved above the post-2012 down trendline. The recent decline has left the index at the important juncture of two potential support levels near the 51,500 area:
- The 61.8% Fibonacci Retracement of the March-September rally
- The top side of the broken post-2012 down trendline
Additionally, the jump in the volatility has produced a measurably visible opportunity. Thanks to the existence of the CBOE Volatility Index tied to the iShares MSCI Brazil ETF (EWZ), we can see just how volatile the Brazilian market has been. Last week, the EWZ VIX rose to a record high 73, smashing the previous record of 63 set at the depths of the 2011 decline. If the VIX is to be taken as a measure of fear, investors are truly fearful right now. The previous 4 spikes in the EWZ VIX above just 40 in 2011, 2012 and 2013 have led to rallies of between 20% and 40% each time.
So while there are no guarantees, especially with the short-term sky-high volatility, a couple key factors are lined up to support a rally in Brazilian stocks. Current prices are at key potential support levels and the “fear guage” Volatility Index on Brazilian stocks is a a record high. These conditions should provide at least a temporary lift to the market. Of course, markets don’t always do what they “should” do. If the Bovespa cannot hold this key level, especially in the event of an unfavorable election outcome, the market may continue to sag.
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