Brazil's Olympic Gold Dance
As the Bovespa [47,341] touches painful four year lows one can’t help but want out.
The Brazilian market is down a whopping -34% since it’s November 2010 highs near 72,500. Compare that to the Dow Jones Industrials +34% rally between November 2010 highs and current May 2013 all time highs. To say that the Bovespa or the EWZ [$43.50] has underperformed is putting it mildly.
It does not take much effort to realize that this heavily mining dependent economy has been dragged lower with declining prices for commodities like Gold, Silver, Copper, Corn and Sugar just to mention a few. The mining sector has been searching for a bottom for years and anyone holding any mining stock has been clobbered mercilessly. In fact the GDX [$24.00] never substantially took out the November / December 2010 highs even though the Gold index pushed and pushed persistently and in breathtaking fashion to all time highs jumping +26% between November / December 2010 and it’s eventual intraday high of $1,923 in September 2011 (as the mining index and the Bovespa did nothing).
What this shows is that the Bovespa is influenced by the price of the Gold metal to some extent but not always directly one for one. It is the state of the mining industry that has determined the direction of the Brazilian market over the last few years.
At the very moment the fact that the Gold index [$1,292] and the GDX are staging multi-year lows forces the Bovespa to be on a free fall too.
Anyone who has been long the EWZ here in the US has been shredded by the recent move in the commodity space. Commodity exports are around 30% of Brazil’s GDP hence the correlation between commodities and the Bovespa.
The recent riots by the Brazilian middle class with an estimated one million protesting ‘Brazilians’ taking to the streets recently as they feel left out of the nation’s growth has helped pin down the Bovespa too.
There is your proverbial blood on the street - literally and figuratively speaking.
Recent economic quarter to quarter activity saw a dismal +0.6% growth forcing Nomura Securities of New York and Barclays Capital to lower their 2013 full-year GDP growth forecast to 2.5% from their previous projections of 3.4% and 3.0% respectively.
Yes it’s not exploding growth and prices reflect as much.
All might not be lost though. Read on...
The contrarian approach prefers to look ahead and discount the reasons why prices are depressed for the moment. Yesterday and today are accounted for but tomorrow is an exciting yet risky unknown.
There is a worldwide trend that has developed over the last three decades that one can look towards for some indication of where the Bovespa will be trading 2 - 3 years out.
This trend has to do with the 1 - 2 years stock market performance leading up to the year of the summer Olympic games since 1984 - excluding the actual year of the Olympics. This is based on all the host country stock market performance data I looked at - so this phenomenon could go back even beyond the Los Angeles summer Olympics games of 1984.
Lets take a look at some charts.
The charts below are self explanatory. They point to the fact that since 1984 there seems to be a summer Olympic host country stock market rally on average between 14 months to 18 months before January of the actual Olympics year. It suggests that generally markets peak more than six months before the opening ceremony.
*Please note that the above chart used the Dow Jones Industrials performance because the IBEX did not start trading until mid 1991. The black line represents the Dow and the red and black line represents the IBEX. Generally the chart shows that they tracked each other hence the use of the Dow to calculate the approximate performance -or at the very least the trend - of the Spanish / Madrid market before the 1992 Barcelona Olympics.
Another way to look at the above data is to realize that 100% of the time over the last 8 Olympic games markets have bottomed on average 16.4 months while gaining on average +44% going into January of the actual Olympic year.
Depending on one’s time horizon there could be an opportunity here. The biggest moves always come when there is blood on the street - we all know that. Timing on the other hand is not easy. If one can commit to buying a few shares here and there of the EWZ or high beta Brazilian stocks over the coming weeks and months then the coming 2 - 3 years could snag them a handsome profit. Patience is the key here and buying small amounts of shares as the prices get cheaper is the key.
It should also be noted that generally world markets - using the Dow Jones Industrials historical chart below - are up about one and a half years leading up to January of every year when summer Olympic games are held at least going back to 1950 with the exception of the 1976 Montreal summer Olympic games where the Dow was flat.
I leave you for now with the gold index trading at 1290, the GLD at $124.81, the GDX at $24.08, the EWZ at 43.50 and the Bovespa at 47,259.
We have about two and half years before the Rio 2016 summer Olympic games so if history is to repeat itself the Brazilian market should be even more attractive after next summer.
For more go to http://marketfy.com/store/item/mauthe/preview/
Good luck to all.
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.