Why Brazil And Other Latin American Stocks Are Due For A Pullback (EWZ)

Image of Brazil flag flying

From Dana Lyons: Latin American stocks have been on a tear of late, but one piece of chart resistance could put a freeze on the rally.

Among the stock market leaders during 2017, and throughout the post-2016 rally, has been the Latin American region. With countries like BrazilChile and Mexico on fire, it’s no surprise that the S&P Latin America Index (SPLAC) is up some 30% this year alone. It wasn’t so long ago, however, when Latin American stocks were not so en fuego.

Back in February 2016, Latin America was among the worst-performing segments of the global equity market, having lost more than 70% from its 2008 peak. Things were so bleak, in fact, that the SPLAC actually dropped briefly below its 2008 low to register a new low for the decade. In a post that month, we wondered Will Latin American Stocks Finally Find Support at that key level? From the post:

“In this case, things are so bad they may be good. The 2008 low is a major low that should produce some sort of a bounce, at least in the short-term. Whether it will produce a sustainable bull market remains to be seen.”

As it turns out, the SPLAC did indeed bounce from there – and it has been a sustainable bounce thus far. A year and a half later, the index has gained exactly 97% since its 2016 low.

With Latin American stocks now pushing 3-year highs, it seems that nothing can slow them down. A glance at the SPLAC chart, however, reveals one piece of potential resistance that may at least put a freeze on the red hot region, even if it’s just temporary.

As yesterday’s Chart Of The Day points out, the S&P Latin America Index is now bumping into the Down trendline (on a log scale) stemming from its 2011 high and connecting the 2014 peak.


Another argument in favor of at least a pause here in the Latin American equity rally comes from Brazil. A couple weeks ago, we noted that the Brazilian Bovespa had broken out above its February and May highs. This, we argued, “opens immediate upside in the index to its all-time highs above 73,000 set back in 2008 and 2010.” The Bovespa has already hit those highs, reaching them during yesterday’s pop.


So will the former Brazilian highs and the aforementioned trendline slow down the Latin American stock rally? One piece of contrary evidence is that we have the SPLAC breaking above key Fibonacci resistance stemming from the 2008 and 2014 peaks that had held prices down in February and May. So the case is certainly not clear cut. However, there is enough evidence to suggest at least a pause in the rally.

For our unabridged assessment of the rally and potential near-term resistance in Latin American stocks, we lay out our specific strategy, including our preferred trading vehicle and specific levels to watch in a premium post at The Lyons Share.

The iShares MSCI Brazil Index ETF (NYSE:EWZ) was unchanged in premarket trading Friday. Year-to-date, EWZ has gained 27.64%, versus a 11.46% rise in the benchmark S&P 500 index during the same period.

EWZ currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #1 of 23 ETFs in the Latin America ETFs category.

If you’re interested in the “all-access” version of our charts and research, we invite you to check out our new site, The Lyons Share. Considering that we anticipate an extremely challenging investment environment approaching, there has never been a better time to reap the benefits of our risk-managed approach. Thanks for reading!

Disclaimer: JLFMI’s actual investment decisions are based on our proprietary models. The conclusions based on the study in this letter may or may not be consistent with JLFMI’s actual investment posture at any given time. Additionally, the commentary provided here is for informational purposes only and should not be taken as a recommendation to invest in any specific securities or according to any specific methodologies. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.

This article is brought to you courtesy of Dana Lyons, JLFMI and My401kPro.