A break in the Brazilian bounce?

Key Points

• In October 2021, Jason wrote this article suggesting better days ahead for Brazilian stocks
• The next day I wrote this piece highlighting an options trade as well as a delayed buy signal
• Brazilian stocks have quietly rallied sharply since early 2022
• Unfortunately, seasonality suggests that a "pause" may be in the offing

Brazil's bounce off of historic oversold levels

In his article on 10/28/2021, Jason highlighted what happened in the past when the IBOV McClellan Summation Index became oversold. The results are displayed in the screenshots below.

The next day I ran with Jason's idea and examined the performance of EWZ (iShares MSCI Brazil ETF) when the IBOVESPA McClellan Summation Index dropped below -1300. The results were very similar using EWZ, as shown below.

In that article, I also noted the potential for using this as a "delayed buy signal." This involved waiting two months after the actual McClellan Summation signal to buy and then holding for ten months. Previous results appear below.

As shown in the screenshot below, this indicator gave two more subsequent signals - on 11/1/2021 and 11/4/2021. By waiting two months, the entry point would have been 1/4/2022.

From 1/4/2022 through 3/4/2022, EWZ has gained +26% (while the S&P 500 Index lost -9.7%).

An options trade update

In my original October 2021 piece, I highlighted an example options trade using options on EWZ. The current status of that position appears in the screenshot below (courtesy of Optionsanalysis).

Since 10/28/2021, EWZ is up roughly +12%. The example options trade is up over +50%. As it turns out, now may be an excellent time to consider taking some profits.

EWZ Seasonality

EWZ is entering an unfavorable seasonal period. This does not mean that EWZ is destined to decline during this period. It does suggest the possibility, which means that anyone enjoying profits in EWZ may consider locking some of those profits in for the time being.

The chart below displays the annual seasonal trend for EWZ.

Note the period of seasonal weakness extending from Trading Day of Year (TDY) #43 through TY #56. For 2022 this extends from 3/4/2022 through 3/23/2022.

The chart below displays the cumulative growth of $1 invested in EWZ only during this period each year since 2001. The cumulative result is a loss of -64%.

The table below displays a summary of the results.

What the research tells us…

The Brazilian stock market reversed almost perfectly on schedule following its oversold readings in late 2021 and has been one of the few countries to show a gain so far in 2022 (a substantial gain at that). As is usually the case, many traders are just now becoming aware of this performance. Unfortunately - and also as is typically the case - just as traders discover an outperforming market, it may be poised for at least a temporary setback. 

The one piece of good news is if EWZ pulls back during March, it may set up a good buying opportunity that could last into October.