The iShares MSCI Brazil Index Fund (NYSE:
), the largest exchange traded fund (
) tracking the largest Latin American economy, has technical
problem. On Monday, the fund dropped below critical support at
$50, touching a new 52-week low in the process. Volume was nearly
39% above the daily average, indicating at least a tinge of panic
selling in the embattled fund.
Things were not supposed to be this way for Brazilian equities
and this ETF in particular. In November 2011,
Barron's extolled the virtues of investing in
. One of the most widely respected financial publications in the
world splashed across its November 7, 2011, cover: "Brazil: Now
Is the Time to Invest."
Brazil's appearance on the cover of Barron's has worked out to
be the equivalent of the
for the iShares MSCI Brazil Index Fund. The theory behind the
Madden Curse is that NFL players who appear on the cover of the
venerable Electronic Arts (NASDAQ:
) video game franchise either get hurt or head to obscurity soon
thereafter. Since Brazil made the Barron's cover, this ETF is off
In reality, it is not fair to blame Barron's. Another
unfortunate dose of reality now exists for the $6.9 billion ETF:
The longer the fund labors below $50, the longer sellers run the
show. The fund's technical cocktail is nothing short of toxic.
provided by TradeWithPete.com
shows the ETF has experienced a death cross, where the fund's
50-day moving average crosses below the 200-day line.
In addition to that, it is possible a head-and-shoulders
pattern has formed. If valid, this would mean even if the fund
rallies, its upside could be limited to neckline resistance in
the $54 to $55 area.
Where poor technicals exist, poor fundamentals usually are not
far behind. Or maybe the poor fundamentals come before the ugly
technicals. It does not matter which one is the winner of this
chicken-and-egg argument because this ETF is afflicted with both
Much of the Brazil ETF's poor fundamentals can be blamed on
), Brazil's state-run oil company. Two Petrobras securities
combine for about 15.7% of the fund's weight, forcing it into
a long line of ETFs
that have been doomed by excessive exposure to Petrobras.
To say Petrobras is a disappointment among major oil stocks is
an understatement. The fact that Brazil's presalt fields are home
to some of the largest reserves in the world has meant nothing
for this stock. In the past two years, it has plunged almost 51%.
Comparable rivals Exxon Mobil (NYSE:
), Chevron (NYSE:
), Royal Dutch Shell (NYSE:
) and BP (NYSE:
) all have delivered solid returns over the past two years.
Blaming the bad performance on Petrobras being a state-run
company does not work either. PetroChina (NYSE:
) has risen almost 12% since June 2010. Colombia's Ecopetrol
) has surged more than 85% over the same time frame. Petrobras
slid 9% on Monday to close at $17.84, a price level not seen
since December 2008.
iShares MSCI Brazil Index Fund's problems do not end there.
The ETF has a 23.7% allocation to financials, another sector
where there are superior alternatives to what Brazil has to
offer. Itau Unibanco (NYSE:
) has dropped 40.2% in the past year. Colombia's Bancolombia has
lost 10% over the same time, while Peru's Credicorp (NYSE:
) has soared 47%.
The iShares MSCI Brazil Index Fund has other potential issues,
technically speaking. Looking at a weekly chart of the ETF shows
that next support is $47.70, which also happens to be the 61.8%
Fibonacci retracement level. Below that, the fund has little in
the way of material support, and the low $30s, perhaps even
lower, could not be ruled out.
The question investors are left to ask themselves is will the
Brazilian economy and growth story get back on track? Yes, Brazil
and its equities will come back. Still, those that are looking to
bargain hunt with Brazil ETFs would be best served by finding
those funds that offer only slight Petrobras exposure or no
allocations to the stock at all.
For more on Brazil ETFs,
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