Market Overview

Someone's Betting Mexican Stocks Are Poised To Pop

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Someone's Betting Mexican Stocks Are Poised To Pop

This year, the MSCI Mexico IMI 25/50 Index (M1MX5IM) has been dismal compared to the MSCI Emerging Markets. The Mexico benchmark is up just 1.31% year-to-date compared to a gain of 9.09 for the emerging markets index.

What Happened

Making matters worse for Mexico equity bulls is the fact that the MSCI Mexico IMI 25/50 Index has been deteriorating. Just this month, that gauge is lower by 5.10%, putting pressure on exchange-traded funds, such as the Direxion Daily MSCI Mexico Bull 3X Shares (NYSE: MEXX).

MEXX, which is just over two years, old attempts to deliver triple the daily returns of the MSCI Mexico IMI 25/50 Index. Unfortunately, MEXX is doing its job. Its July loss is about triple that of its underlying index.

Why It's Important

Data suggest some traders are betting Mexican stocks are ready to snap out of their doldrums and some of those traders are embracing MEXX. For the five days ending Wednesday, July 24, volume in MEXX was more than 101% above the trailing 20-day average, according to Direxion data. That was good for the largest increase among all of the issuer's leveraged products over that period.

Other data points indicate betting on MEXX should be no more than a short-term affair. The International Monetary Fund (IMF) recently pared its 2019 GDP growth forecast for Mexico to 1% and some economists believe Latin America's second-largest economy is flirting with recession.

“But ahead of GDP data for the second quarter due on July 31, a debate has raged over whether all that gloom adds up to a recession,” according to Reuters. “Several banks say definitely yes - an assessment that could call into question the ability of President Andres Manuel Lopez Obrador’s eight-month-old government to deliver on his promises of development and improved fortunes for the country’s poor.”

What's Next

Interestingly, the recent volume spike in MEXX has been accompanied by capital flowing into the leveraged Mexico ETF. For the 10 days ending July 24, inflows into MEXX equaled more than 41% of the fund's assets under management, good for the highest percentage among all Direxion leveraged funds, according to issuer data.

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