What a difference a year makes. Brazil's Bovespa index sat among the world's best-performing stock benchmarks in 2019, but it is currently underperforming the S&P 500 by roughly 25% year to date (YTD) in 2020 amid a backdrop of economic and political uncertainty.
The country's economic fallout from the coronavirus escalated Friday on news that Sergio Moro, Brazil's popular justice minister, had resigned, with the high-profile departure stoking concerns that the nation's Economy Minister Paulo Guedes might be next to exit President Jair Bolsonaro's cabinet.
"The conflict with Moro undercuts his electoral base, and Brazil can't afford to be leaderless, not in the biggest economic collapse in generations," said Paul McNamara from London-based asset manager GAM, according to Reuters.
Traders who want to bet against Brazilian stocks should monitor the two inverse exchange-traded funds (ETFs) discussed below as well as one of the nation's leading banking firms listed on the New York Stock Exchange (NYSE). Let's take a more in-depth look at each and explore several tactical short selling opportunities.
ProShares UltraShort MSCI Brazil Capped ETF (BZQ)
With assets under management (AUM) of $24.95 million and a 0.95% expense ratio, the ProShares UltraShort MSCI Brazil Capped ETF (BZQ) aims to deliver twice the inverse daily performance of the MSCI Brazil 25/50 Index. Financial companies comprise about 35% of the underlying benchmark, making the fund particularly suitable for those who want a geared bet against this economically sensitive sector. An average daily trading volume (ADTV) of over $12 million, along with a narrow 0.10% spread, minimize transaction costs for active traders. BZQ yields nearly 1% and has soared 74.20% YTD as of April 27, 2020.
The ETF's share price broke above a multi-month falling wedge pattern in late February but quickly retreated into a support area between the 50- and 200-day simple moving averages (SMAs). After consolidating for several weeks, the fund recommenced its uptrend Friday, surging 16% on heavy volume to close comfortably above the 50-day SMA. Those who buy here should look to book profits at either the September 2018 or March 2020 swing high. Cut losses if the ETF closes beneath the April 23 low at $29.11.
Direxion Daily MSCI Emerging Markets Bear 3X Shares (EDZ)
While the Direxion Daily MSCI Emerging Markets Bear 3X Shares (EDZ) isn't strictly an inverse Brazil ETF, it does provide around 7% exposure to Latin America's largest economy. The fund, through the use of swaps, futures contracts, and short positions, aims to return three times the inverse daily performance of the MSCI Emerging Markets Index. Trading wise, deep liquidity and razor-thin spreads make the ETF a popular product among bears who want to take an aggressive bet against Brazil. As of April 27, 2020, EDZ controls net assets of $54.22 million and has added 22% on the year. The fund also offers a 1.01% dividend yield.
A recent pullback to the $40 level provides a high-probability trading area given the bulls have – so far – successfully defended a significant horizontal trendline that has been in play for several years. For added confirmation, traders may wait for the moving average convergence divergence (MACD) line to cross above its signal line before opening a long position. In terms of trade management, traders may place a stop-loss order underneath this month's low at $38.49 and anticipate a retest of the October 2018 high at $71.94.
Itau Unibanco Holding S.A. (ITUB)
Brazilian financial conglomerate Itau Unibanco Holding S.A. (ITUB) provides a range of financial products and services in Brazil and globally. As well as facing economic and political uncertainty, the São Paulo-headquartered banking giant also faces the prospect of shrinking profits amid falling interest rates. Trading on the NYSE at $3.66, with a $35.43 billion market cap and issuing a 4.12% dividend yield, the stock has fallen almost 60% YTD as of April 27, 2020.
The bank's shares have formed a descending triangle over the past month after a sharp decline from an established trading range. A breakdown below this classic continuation pattern on Friday suggests lower prices in the coming days, with a test of major multi-year support around $2.70 now becoming a real possibility. Traders who decide to execute a short sale should bail out if the stock closes back above $4, as this could indicate a possible bear trap scenario.