David England: Are Latin American markets weakening?
Column | Eye on the Market

David England: Are Latin American markets weakening?

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Today, I continue to answer questions as to the possible source for the next downturn and focus on Latin American markets and banks to see if this will be the area causing the next downturn.

Why? What happens with our neighbors to the south definitely affects global and U.S. markets, usually within minutes.

Researchers at Moody’s Investors Service identified vulnerabilities that amplify Latin America's credit risks and examined four of the higher-impact vulnerabilities — corruption, global risk such as commodity price fluctuations, tech-driven disruption and the skills gap — in a recent report.

For a moment, I thought they were discussing similar challenges here in Illinois.

Although Latin America encompasses more than 30 countries, the report focuses on six major economies: Mexico, Colombia, Peru, Chile, Brazil and Argentina. Corruption, always a strong disincentive for investors, heads the list of vulnerabilities that hampers growth and investment.

The important question: What do you do with these potential threats? If ever in doubt, simply follow the money. Like with China and Europe, if the Latin American markets and banks weaken, those in higher positions will know it long before we read about it and will begin hitting the sell button on select securities.

The good news, once you learn how to design my relative strength/performance charts, you can see what the institutions are doing instead of what they pay market professionals to say they are doing.

When I see potential threats/opportunities, I first research funds then individual stocks. Let’s begin with top Latin America Exchange Traded Funds (asset size) and compare their performance (since their February 2016 low,) to the strength of the largest fund in the Latin American stock market, the iShares MSCI Brazil ETF (EWZ-green area).

The candidates: iShares Latin America 40 Fund (ILF-red line), iShares Mexico Capped Fund (EWW-green line), iShares MSCI Chile Fund (ECH-pink line), Direxion Daily MSCI Brazil Bull 3X Shares (BRZU-purple line), and iShares MSCI Peru ETF (EPU-orange line). To compare the relative strength performance of the Latin American market to the U.S. market, I included $SPX-black line.

Largest Latin American ETFs

The results, all funds are trading in positive territory. The largest fund, EWZ outperforms the non-leveraged group. The remaining three funds, are underperforming EWZ but are still trading with positive returns. For comparison, the U.S. market ($SPX-black line) is only outperforming two funds in this group.

For my readers looking for trading candidates, I included Direxion Daily MSCI Brazil Bull 3X Shares (BRZU-purple line) to keep front and center as a swing trade candidate. This fund is definitely not one to buy and hold with its erratic action. Get on the wrong side of BRZU, and it can blow out an account in no time.

Within this group, it looks like the Latin American market is in very good shape. If any funds drop under their September 2018 lows, it could signal potential problems ahead. I will monitor these funds for potential trading candidates.

To continue my follow the money theme, let’s view the relative strength/performance of some top Latin American banks in this region, compared to the strength of the largest region fund, the iShares MSCI Brazil ETF (EWZ-green area). The banks and their respective country are as follows: Itaú Unibanco Holding-Brazil (ITUB-blue line), Banco Do Brasil-Brazil (BDORY-red line), BBVA Bancomer-Mexico (green-line), Grupo Financiero Banorte (GBOOY-pink line), Grupo Aval-Columbia (AVAL-purple line) and Bancolombia-Columbia (CIB-orange line).

Latin American Top Banks

All banks in this group are trading in positive territory. Two are outperforming the comparative fund EWZ. What would signal continued weakness? If any banks drop below their previous September 2018 lows, they would qualify as trade candidates.

Do not jump into any of these Latin American banks without the proper buy/sell signals in place. I will be covering these system signals in later columns.

Are you monitoring these funds and banks to help signal the next downturn? If not, simply set an alert if any dive. Some remember the devastating debt crisis in the 1980s with this region. Those holding certain Latin American securities found out the dangers of a “buy and fold” mindset. With this in mind, I keep this group front and center for trading opportunities.

If you want to learn about the many tools and systems to better manage your holdings, email me about my upcoming online training starting in 2020.

What’s next? I wrap with our U.S. market and largest banks. Then we will have the top banks in China, Europe, Latin America and the US, to monitor their relative strength/performance to see if or when cracks are forming.

With the domestic markets continuing to trade near their all-time highs, it is not the time to relax and drop your “fiscal” guard.

Learn how markets really work, to be in the small group, prospering when the next bear market begins. The decision is yours.

Plan your work, work your plan, and share your harvest!

DAVID O. ENGLAND is an investor/trader, financial analyst/educator/lecturer and Associate Professor Emeritus of Finance. This column is for educational purposes only and not intended as financial advice. Past performance does not dictate future returns. Questions? Send to thetraderseye@gmail.com.

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