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Market Overview

Below $50, Problems Await Brazil ETF (EWZ)


The iShares MSCI Brazil Index Fund (NYSE: EWZ), the largest exchange traded fund (ETF) 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 Brazil. 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 Madden Curse 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: EA) video game franchise either get hurt or head to obscurity soon thereafter. Since Brazil made the Barron's cover, this ETF is off 20.4%.

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. Technical analysis provided by 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 problems.

Much of the Brazil ETF's poor fundamentals can be blamed on Petrobras (NYSE: PBR), 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: XOM), Chevron (NYSE: CVX), Royal Dutch Shell (NYSE: RDS-A) and BP (NYSE: BP) 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: PTR) has risen almost 12% since June 2010. Colombia's Ecopetrol (NYSE: EC) 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: ITUB) has dropped 40.2% in the past year. Colombia's Bancolombia has lost 10% over the same time, while Peru's Credicorp (NYSE: BAP) 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, click here.


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