#$pbr

Brazil’s benchmark Bovespa has failed to hold its breakout above last decade’s all-time highs.

In 2008, Brazil’s benchmark stock index, the Bovespa, topped out at an all-time high near 73,000. After nearly a decade-long lull, the Bovespa finally clawed its way back to that level for the first time late last summer. After a brief consolidation, the index pushed its way higher into February of this year, reaching as high as 88,000. Through the early year global equity correction, the Bovespa held firm, consolidating again near those highs into May. Then the bottom fell out.

In the middle of May, the index started dropping. Just 3 weeks later, it was back down to the breakout level of its former highs of a decade ago. We wondered if that former resistance level would now work as support. So far, it has not.

As the chart shows, the Bovespa immediately sliced through its former highs. This leaves the specter of a potential “false breakout” on the chart. Especially considering the magnitude of the attempted breakout (i.e., a level of decade-long importance), a false breakout could bring dire consequences.

So is it a false breakout? And if so, what are the risks. Or should this market be given some leeway before making a judgement? In a Premium Post at The Lyons Share, we take a deeper dive into the Bovespa chart and share our analytical view of this key emerging market development.

If you’re interested in the “all-access” version of our charts and research, please check out our new site, The Lyons Share. You can follow our investment process and posture every day — including insights into what we’re looking to buy and sell and when. Thanks for reading!

_____________

Key chart support may give the beleaguered Brazilian stock market a much needed bounce.

Yesterday, we posted an extensive piece on the bond market, which has gotten a nice lift of late after threatening a major breakdown. Another market in need of a lift is Latin American equities -- Brazil, in particular. Coinciding with the bounce in the U.S. Dollar over the past month, Brazil has had a rough May with the benchmark Bovespa Index down some 10% for the month. Help may be on the way, however, for the battered Bovespa -- as we revealed in our Chart Of The Day yesterday on Twitter.

As the chart shows, the index is testing its Up trendline (on a linear scale) stemming from its early 2016 lows and connecting its June 2017 lows.

Will this trendline provide the spark that Brazilian bulls are looking for? A few weeks ago, we presented another potential trendline of support on the S&P Latin America Index (SPLAC). After bouncing off of the line for a few days, the trendline failed and the SPLAC sliced through it to the downside, accelerating its recent decline. And what about the breaking Petrobras (PBR) news? Is that destined to undermine whatever advantageous technical factors were lined up for Brazil? Only time will tell, but the aforementioned trendline may be the key indicator to watch.

In a Premium Post at The Lyons Share, we take a deeper dive into the charts of Brazil, SPLAC and PBR in attempt to answer those questions -- and determine the odds of a Brazilian lift nearby.

If you’re interested in the “all-access” version of our charts and research, please check out our new site, The Lyons Share. You can follow our investment process and posture every day — including insights into what we’re looking to buy and sell and when. Thanks for reading!

_____________

The 12-month re-emergence of the Brazilian stock market continues apace.

In a December 23 post, we mentioned that our vote for 2016 global stock market of the year went to Brazil. Here is the back story reason why, as laid out in that post:

The Brazilian Bovespa entered the year in the throes of a 5-year bear market that had sliced over 40% off of the index’s 2010 all-time highs. During the global equity weakness at the beginning of the year, the Bovespa dropped below 3-year support levels, plummeting another 15% in just 3 weeks. However, as quickly as the Bovespa dropped, it bounced back just as fast.

By the beginning of March, it was back up testing its breakdown level, prompting our post labeling the Bovespa “The Most Interesting Chart In The World”. It seemed to us that the index would either fail at the breakdown level, initiating its next leg down – or reclaim the breakdown level setting up a massive false breakdown. It turned out to be a massive false breakdown.

After reclaiming the key breakdown level, the Bovespa continued its rally in torrid fashion. By July, just in time for the Rio Olympics, the Bovespa arrived to challenge the Down trendline stemming from its 2010 top and connecting the highs in 2012 and 2014. The index succeeded in overcoming the trendline and furthered its 2016 advance until the beginning of November. When all was said and done, the Bovespa ended up rallying about 75% off of its January low.

The reason for our December post was to note that the Bovespa was in the midst of a pullback that had brought it down to test the post-2010 Down trendline which it had overcome in July. This was near the 56,000 level on the index. As it has done for the past 12 months, the Bovespa responded superbly, bouncing that very day. It hasn’t looked back since and yesterday, it surpassed its October-November peak. That 1-month 15% bounce has the Bovespa at a 5-year high.

Now this isn’t one of those “great risk/return entry point” type of posts. That was the December post. This one is merely to point out that the action in the Brazilian market that earned it market of the year for us last year continues. And while the “easy”, mean-reversion money has been made, there is still big, long-term potential in Brazil after its 8-year consolidation. There are a few significant hurdles left to overcome, including the Bovespa’s all-time high near 74,000, not to mention the 78.6% Fibonacci Retracement of the 2010-2016 decline which happens to be right here near the 65,500 level.

However, should the Brazilian market’s rebound continue apace, an eventual new high and new leg of advance is a reasonable expectation.

_____________

More from Dana Lyons, JLFMI and My401kPro.

The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.

As the Olympics were kicking off, the Brazilian Bovespa scored a key breakout; with the Games wrapped up, the index is testing that breakout point.

“Test Week” continues today with a look at a country that has been in the global spotlight lately, though not because of its stock market. Brazil has been the center of attention recently, having just wrapped up hosting duties for the Olympics. However, its stock market has also been a very intriguing one to us, even earning our designation as “The Most Interesting Chart In The World” not too long ago. And it is presently in a very interesting spot again. For, just as we have noted this week with Germany and REITs, the Brazilian Bovespa is testing a very important level right now.

In mid-July, the Bovespa was on a tear, having just broken above a 2-year Down trendline. With the Olympics approaching, the index had climbed some 34% just since the post-Brexit lows at the end of June. In a post on July 19, however, we noted that the Bovespa was running into a serious potential obstacle in the form of a 6-year Down trendline, stemming from the 2010 highs.

After consolidating just below the trendline for about 2 weeks, the Bovespa broke above it in early August -- on the day before the Olympic opening ceremony. The index would proceed to follow through on the breakout as the 2-week event unfolded, tacking on another 4% or so. As the games drew to a close, though, the rally petered out. And on Monday, the day after the closing ceremonies, the Bovespa dropped more than 2%. And today, it found itself in the vicinity of its trendline breakout of a couple weeks ago.

Now, we don’t know if the coinciding Olympic Games had anything to do with the performance of Brazilian stocks over the past month. And we don’t care. All we care about is what is happening in the markets. And this test, as the chart indicates, could be a very important event for the Bovespa in determining its fate in the near to intermediate-term future.

Like the past few posts, the takeaway is straightforward. If the Bovespa is able to maintain its ground above the 6-year trendline, then the benefit of the doubt goes to the bulls. If, however, prices break back down through the trendline, then a major failed breakout could be at hand. That could lead to significant potential downside in the near-term.

And while it pays only to watch the reaction of prices around this level, one factor that leaves us skeptical about the index’s ability to hold the trendline is the nature of its breakout in the first place. As we have said many times, when the breakout of a significant level is being threatened, we prefer to see a deliberate approach by prices, initially. That is, we like to see prices consolidate below the significant level for some time prior to attempting a breakout. The more times that prices can bump up against the level, the more it can whittle away at its resistance. Thus, a breakout after an extended consolidation typically stands a better chance of maintaining its breakout and of exhibiting meaningful follow through.

In the case of the Bovespa, the 2-week consolidation below a 6-year trendline doesn’t really instill much confidence in its potential to maintain the breakout. Yes, only the price action will tell us if the breakout will be successful or not. However, analyzing the character of the breakout can be useful in determining the odds. And in this case, we have serious reservations about Brazil’s chances of successfully and permanently clearing this hurdle, at least for now.

_____________

More from Dana Lyons, JLFMI and My401kPro.

After resolving its former “most interesting” chart status with a massive breakdown in January, Brazil’s Bovespa is back testing that breakdown level in an equally interesting development.

On September 4 of last year, we labeled the Brazilian Bovespa stock index “The Most Interesting Chart In The World”. You’ll recall that, at the time, global equity markets were knee deep in one of those “markets in turmoil” phases, to borrow a term from alarmist financial television. Thus, to be granted such a title, the Bovespa must have been a real doozy. Well, we’re chart geeks, but we thought it was special.

Specifically, at the time the Bovespa was involved in an epic bull/bear battle, pitting the following chart forces against one another:

In The Bull Corner: the 61.8% Fibonacci Retracement of the Bovespa’s 2008-2010 rally around 46,150, which the index held a half dozen times over the prior half decade.

In The Bear Corner: a potential massive head-&-shoulder pattern formed over the prior 2 years, with the the 61.8% Fibonacci touches serving as the neckline.

Which scenario would be victorious in this epic, and interesting, battle? We had no idea. As I told many people: “I’m confident it is going to move BIG…I just don’t know which way yet.” The irony was that, in the post’s aftermath, the Bovespa trodded along the line of bull/bear demarcation for nearly 4 months, refusing to reveal its grand decision. Thus, for 4 months, the Bovespa transformed into essentially the least interesting chart in the world.

Then things got interesting again. On the first day of 2016, the Bovespa broke, and broke hard as we suspected it eventually would. It lost 3% on that first day and wouldn’t look back. By 3 weeks in, it was down over 14% for the year. Things looked hopeless for the Bovespa.

Then another interesting thing happened. The index bounced -- and has continued to bounce up through today’s action. Now, just about 5 weeks after hitting its -14% YTD rock bottom, the Brazilian Bovespa is actually up for the year.

This is where it gets “most interesting chart in the world” type of interesting again. The Bovespa is now testing the lower bounds of its massive head-&-shoulders/Fibonacci breakdown level that marked the chart’s “most interesting” status in the first place.

Here it is up close:

What makes the chart so interesting now? It is essentially setting up a similar scenario as in September, i.e., a likely very large move -- in either direction. The previous setup involved either a substantial up-move off of massive, multi-year support -- or a substantial drop should that support fail to hold, with the added pressure of a multi-year head-&-shoulders pattern. Well, the head-&-shoulders scenario won out, as we mentioned, leading to that immediate 14% plunge to begin the year.

Now, the scenario revolves around the confirmation, or rejection, of that massive head-&-shoulders breakdown. Either of the 2 outcomes could, again, have monumental consequences and entail substantial moves as a result.

A confirmation of the breakdown (i.e,, this area acts as resistance) should lead to another large decline, and very likely lower lows than those seen in January. Conversely, a rejection of the breakdown (i.e., price rises above the breakdown zone), would constitute a false breakdown. False breakdowns often lead to up moves every bit as powerful as the potential breakdown would have been. Considering the magnitude of support and the scale of the head-&-shoulders formation that was broken, should it turn out to be a false breakdown, the potential upside probably could not be overstated.

So what level should we key on to instruct us as to which scenario wins? No level should ever be taken as gospel, so we are considering a range of potential levels that could encompass the Bovespa’s “test” of its breakdown. That range would essentially extend from former lateral support around 44,000, which the index is testing today, up to the diagonal extension of the hypothetical head-&-shoulders neckline, currently just above 47,000. The reaction at this area could set the tone of the Brazilian stock market for the next several months, or possibly even years to come.

We don’t always focus on Brazilian stocks; but when we do, we prefer dos posiblementes grandes.

_______

More from Dana Lyons, JLFMI and My401kPro.

Negativity vs. negatives. When are we going to be officially too negative over the same old worries: commodity collapse out of China, Fed rate hikes, and Volkswagen?

Let's take the last first. 

The Volkswagen company, with its tortured, insular ownerships, is being viewed everyday as a looming disaster. Oddly, though, it is only looming for that company. When Toyota had a horrendous recall not that long ago, one that many thought would wipe the company out, it was viewed only as negative for Toyota. DittoGeneral Motors.

Right now, though, Volkswagen is weighing on the whole sector. I think that's just stupid, but it is a sign of how early we are in the crisis. Will Volkswagen survive? I think yes. In this form? No, I don't think so. But, regardless, sales are going elsewhere and that's bullish for all of the other car companies.

The Fed? 

It is rapidly becoming a sideshow. I don't want to fight the Fed's moves anymore, because they are becoming silly. The Fed has become a major distraction because those who keep pushing the Fed clearly must think that none of the weaknesses we see in manufacturing have anything to do with the Fed. And the Fed wants to take rates to where it can cut them if things get slower.

Nowhere does anyone seem to ponder whether the Fed won't be raising rates now only to cut them a year from now in an existential crisis of meaninglessness. But that would seem to please most watchers now, so I think it is no longer practical to develop a worldview without assuming a hike by year-end, and the arguments against it are so obvious that they are no longer worth articulating. What's going to be done is done.

Finally, there's the commodity collapse and China. 

The copper complex is dominated by Glencore and Freeport-McMoRan. Both need to raise more money than they can. Who knows what will happen there, but can we stipulate that it's not bullish? The Saudis could easily raise the price of oil tomorrow, there's that much demand.

But that would allow new life to be breathed into this business domestically and would save Petrobras, which you have to figure it knows it will soon default on its debts if no price rise occurs. To make a big decision with your capital before Glencore and Petrobras are resolved has become almost foolish. We need to see how things play out

As it is, when it comes to the commodities business, credit is being cut off pretty summarily as anyone who watched the torturous Olin deal on Friday, when the chemical company had to pay 9.75% for money to be able to buy Action Alert PLUS portfolio holding Dow Chemical's commodity chemical business.

Hideous.

I don't even want to speculate what will happen with little outfits like Cliffs Natural or Peabody or Arch, all if which are knee-deep in the collapse of Chinese commodity demand that is not only slowing but seems to be grinding to a halt.

Within this piece is pretty much the whole catalogue of why we are in a bear market. You need all of these cleaned up before any advance can be trusted.

Image Source: Leszek Leszczynski 

A key gauge of manufacturing activity in China plummets to Financial Crisis lows, Brazil’s Petrobras may be the first major casualty of the country’s deepening recession, and lenders are beginning to tighten the noose on overleveraged commodity producers in America. 

The Federal Reserve meeting last week came and went, and now the markets are back to focusing on fundamentals, as they should. The problem for equity investors, however, is that the fundamentals aren’t great, and it is becoming increasingly more difficult for even the most bullish investors to find reasons for optimism, at least in the near term.

The economic environment in China continues to worsen. We outlined our grave concerns regarding the implications of its collapsing stock market on the health of the country’s property market, and the resulting consequences on China’s largest banks. Commodity-linked entities in China continue to feel pain, and the preliminary reading on the Caixin China manufacturing purchasing managers’ (PMI) index fell to Financial Crisis lows of 47 in September, below last month’s measure, analysts’ forecasts, and signaling economic contraction. The reading hasn’t been this low since the panic bottom of March 2009, and we maintain the view that conditions in China may be even worse than feared.

Weakness in Asia has already spread. Export-dependent countries, including Brazil and Canada, are already in recession, and the former may be in a world of trouble. Political scandals and corruption, asset flight and resulting currency weakness are only exacerbating the hazards related to the country’s financial health. S&P recently downgraded Brazil’s sovereign debt to junk status, and there may be little the country can do to pull itself out of a recession, absent a recovery in commodity prices, which may not happen anytime soon without a sustainable bounce in China export demand, clearly out of reach at the moment.

Brazil state-run oil giant Petrobras may be the first major casualty of the country’s deepening recession as a result of a triumvirate of corruption, weak earnings from collapsing crude oil prices, and exorbitant levels of US dollar-denominated debt in the face of an ever-weakening real. Net income at the company dropped 90% in the second quarter on an operating income decline of nearly 30%. Free cash flow of R$4.5 billion during the first half of 2015 is practically negligible compared to the firm’s total indebtedness of R$415.5 billion. Net debt on a US dollar basis stands at over $104 billion, and it’s difficult to envision a positive scenario for Petrobras investors without help from improving crude oil prices.

In an uncharacteristic two-notch move, S&P cut Petrobras from an investment-grade rating of BBB- to BB, junk status, earlier this month. The Brazilian oil giant is now the largest non-investment-grade corporate issuer, and prices for its bonds keep falling. Confidence has been shattered, and reports indicate that credit default spreads on the firm’s debt are “exploding.” As member nations of OPEC continue to produce to put US domestics out of business, Petrobras has been caught in the crossfire. The company may very well be forced to restructure its ballooning $90+ billion in dollar-denominated debt soon, and ironically, it may be the Fed that will eventually push Petrobras over the edge. Asset flight out of Brazil into US assets in the event of a rate hike in the US could weaken the real to a point where Petrobras’ debt becomes too expensive to service, even if crude oil rebounds.

All is not well with US producers of oil either. Line Energy sounded the alarm bell when it announced that it would suspend its distribution on account of concerns that its borrowing capacity would be cut once banks reassess their crude oil price decks, a twice-yearly occurrence. Bloomberg reported today that almost 80% of oil drillers will “see their borrowing base cut,” according to a survey by Haynes and Boone LLP, marking the beginning of the end of this debt-infused stock bubble, in our view. We’ve long stated that even the dividends of energy bellwethers, Chevron and ConocoPhillips may not be safe. The sharks are circling.

The size of credit lines in the energy arena have been for some time completely detached from fundamental credit quality, in our view, so even an average credit-line cut of ~40%, according to the report, may only be the beginning, if credit markets continue to tighten. We would expect the probability of dividend cuts on the weakest upstream entities to increase, and many in the midstream space may eventually become victims of contracting credit, especially those that point to their revolver as a means to manage the dividend with minimal cash on the books. We continue to believe the master limited partnership model will be challenged during this cycle as credit dries up, and it is not surprising to see Energy Capital Partners looking to dump MLP assets, its interest in Summit Midstream.

Stock market bulls continue to point to the view that because stocks only make up 15%-20% of Chinese household wealth that there is no need to worry about the growing risks of a global economic calamity. Those same bulls, however, may not know that only 16% of households were invested in US stocks right before the Crash of 1929. Though a Great Depression is simply not a possibility this day and age, in our view, we don’t think the global selling in equities is over, and it may not be for a while. Indexers could be in for more pain, as the Fed may hike not once but twice this year in failed attempts to counter-intuitively reestablish market confidence by communicating through the rate hikes that all is well. Bad news, however, is bad news again, and the Fed put is no longer in place.

Want more Valuentum commentary? See here.

About the Author: Brian Nelson is the president of equity research and ETF analysis at Valuentum Securities. Before founding Valuentum in early 2011, Mr. Nelson worked as a director at Morningstar, where he was responsible for training and methodology development within the firm’s equity and credit research department. Prior to that position, he served as a senior industrials securities analyst covering aerospace, airlines, construction, and environmental services companies. Before joining Morningstar in February 2006, Mr. Nelson worked for a small capitalization fund covering a variety of sectors for an aggressive growth investment management firm in Chicago. He holds a Bachelor’s degree in finance and a minor in mathematics, magna cum laude, from Benedictine University. Mr. Nelson has an MBA from the University of Chicago Booth School of Business and also holds the Chartered Financial Analyst (CFA) designation.