February 22, 2010

BRIC Component ETFs

(Click to enlarge the graphic).

The BRIC Index is a longstanding emerging markets darling. Are its components behaving similarly, or is there a leader?

The logarithmic weekly line on close charts above plot (clockwise, beginning upper left), the iShares MSCI Brazil Index ETF (EWZ), Market Vector Russia ETF Trust (RSX), iPath MSCI India Total Return ETN (INP), and the iShares FTSE/Xinhua China 25 Index ETF (FXI). Purple vertical dashed lines on each chart denote the most recent swing high and low dates of the S&P 500; red vertical dashed lines denote swing high dates in the individual ETFs, and the swing low date from the China ETF itself. A Fibonacci retracement grid is drawn from the highest high to lowest low on each chart, their price derived from OHLC data not present in a line on close chart. Finally, a fuchsia horizontal dashed line is drawn at the 50 percent retracement level on each chart.

When the S&P 500 made its high in Oct 07, the Chinese market (lower left) peaked in near unison relative to the other BRIC components. India (lower right) was next to peak in Jan 08, but it took nearly four months longer for both Brazil (upper left) and Russia (upper right) to apex in May 08. The alignment in time regarding the S&P and Chinese markets was as telling as the disparity in time as to the other three tops - clearly China was more sensitive to domestic equity valuations than its BRIC component partners during Fall 07. That India has followed more in gear with the S&P 500 relative to both Brazil and Russia intimates it is perhaps second to China as to its sensitivity to US domestic equity.

Studying the bottom is revealing as well. Each chart denotes both the Oct 08 low in Chinese markets (again, red vertical dashed lines) as well as the Mar 09 low in S&P's (purple vertical dashed line). On a market-by-market basis, Brazil and China broke from both Russia and India by setting new lows. Clearly Brazil and China represented better investment opportunities relative to not only their sister BRIC markets, but the S&P 500 as well. Money was indeed flowing to these two markets.

While not plotted, overlaying the S&P 500 on any of these charts reveals a distinct winner - Brazil. Indeed, we've discussed in the past that Latin American markets are outperforming to the upside in each of cyclical bull phase of this ongoing secular bear market. These charts affirm this move on two counts. First, Brazil bottomed sooner than domestic equities (albeit with initially greater volatility than that of China). Second, looking at the Fibonacci retracement grids above, only the Brazilian market has been able to break above a 50% recovery drawn peak to trough.

Overlaying the S&P on these charts, technicians will find the Brazilian market is plainly outpacing US domestic equities. The Chinese markets have rolled over in unison with the S&P 500, and both Russia and India have begun to trade in gear. Each of these three markets - China, Russia and India - is showing no deference over the S&P 500 near term having been unable to break through a 50% recovery. Not so with the Brazilian markets, where these Latin equities broke though this barrier with strength, and are now showing signs of critical support near former resistance.

We've noted in weeks past that the rise in US equities has come on the back of a weakening US Dollar. That relationship decoupled briefly at the start of this calendar year, with equities finally falling off in the face of a strengthening greenback toward the end of Jan 10. At the end of last year, we also warned US interest rates appeared poised to rise. That analysis appears to have come to fruition as the Fed upped the discount rate just last week. Technicians should review these relationships for signals as to where equities may go next. Should rates continue rising, and the Dollar strengthens, a "coupled" scenario would hold that equities should fall. However, if we instead see a "decoupling" of this relationship, and equities continue their rise, then long only positions should look to Latin American markets for greatest strength.

Jeffery E. Lay, CMT
President
Talon Eight, LLC

Disclaimer: This post is intended solely to disseminate information, and is not, and shall not be construed to constitute financial, investment or other similar advice. All posted material should be independently verified for accuracy and current applicability. Readers of this post are referred to the Risk Disclosure for further information.

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