Is the Brazilian 20% Stock Market Rout an Opportunity?
The post-election selloff pushed this ETF into oversold territory. Here’s how I reacted.
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The largest stock market in Latin America was just routed.
Stocks in Brazil nearly experienced a technical crash on Monday, falling by almost 20% after the re-election of incumbent president Luiz Inacio Lula de Silva, better known as Lula.
Lula’s victory was stunning because he finished behind challenger Flavio Bolsonaro in a broader election earlier this month, losing 47.03% to 45.16%. As recently as Saturday, Bolsonaro was heavily favored to win the head-to-head runoff vote on prediction markets Polymarket and Kalshi.
Then on Sunday, Lula scored 51.79% of the vote, while Bolsonaro came in at 48.21%. The polls and prediction markets were wrong.
Bovespa Bulls Are Gored
This was unwelcome news for Bovespa bulls, as Brazilian stocks plunged on the news. I’m currently long Brazilian stocks via the iShares MSCI Brazil ETF (EWZ). This ETF holds a broad swath of major Brazilian names, across the materials, energy, financials, and utilities sectors.
EWZ is now below our initial purchase price of $37, as indicated here. However, I’m grateful that we avoided buying additional shares when the ETF soared to $43 prior to the runoff election, as noted here.
Too Tempting
However, like a juicy picanha steak, Monday’s selloff to $32 was too tempting to pass up. That’s because the EWZ chart indicated an oversold condition, according to the relative strength indicator.
EWZ’s RSI was still oversold at 28.84 (bottom right of chart) long after the ETF climbed from its lows. Any reading below 30 indicates an oversold condition. It was the first oversold RSI reading for the Brazilian ETF since June.
By picking up additional shares near $32, we were able to lower our cost basis on EWZ from $37 to $34.50. The oversold rally carried late into the trading day, with EWZ climbing back above a key support level prior to the close (black line).
The More Things Change…
I don’t normally average down on any investment — in fact, I’m much more likely to average up — but this seemed like an overblown, almost emotional reaction to the election news.
After all, when we first purchased shares of EWZ, Lula was president of Brazil. Today, he’s still president. Nothing has really changed. This market got way ahead of itself on the way up, and it did so again on the way down.
Bottom Line
According to the above chart, EWZ spent most of the past six months oscillating above and below its 200-day moving average (red line). That moving average is currently located near $37. I expect that when the dust settles, we’ll find ourselves in that area again. If and when it does, we’ll reevaluate EWZ our position.
At the time of publication, Ponsi was long EWZ.
