Below we offer a brief example of a Signals Matter ETF trading example using the EWZ ticker for Brazilian stocks.
Our trading guru, Tom Lott, spent years enjoying Brazil (limited to Rio mostly) and has fond memories traveling there with the World Bank Group, back when Brazil was truly a developing country. At that time, Rio was primarily a tourist stop for him on the way to Africa as he commuted to places like Mauritania and Senegal.
A lot has changed for Brazil since then. Today it has the 9th largest GDP. In addition, Brazil is the largest country in South America, the 5th largest country in the world by area, and the 6th largest by population.
In short: Brazil matters.
As a member of the BRICS (Brazil, Russia, India, China and South Africa) group of countries, Brazil has a particularly important status within the emerging markets, and thus inspires investors on both the long and short trade.
And rightly so.
Despite our macro concerns of the “everything bubble,” we trade on signals, not macros alone. And we’ve been watching Brazilian markets as well, mostly through the looking glass of an ETF described below.
In this example, we’ll talk about what we traded, how we traded it, and why we traded it. You’ll begin to see how our trading themes consistently measure and respect: 1) fundamentals, 2) technicals, 3) liquidity, 4) patience and 5) risk management.
This iShares MSCI Brazil Capped ETF (EWZ), is an exchange-traded fund traded in the United States. EWZ was created by iShares to enable investors to achieve investment results that correspond to the performance of the broader MSCI Brazil 25/50 Index.
EWZ invests in mid- and large-cap companies in Brazil representing 85% of the Brazilian stock market, providing the kind of comprehensive coverage that we find attractive here at Signals Matter.
EWZ is a large ETF, with a market cap of USD 7.3 billion and average 30-day trading volume of 16.7 million shares, making it sufficiently liquid to trade. Remember: liquidity matters.
Lately, this ETF had been on a tear, up 31% YTD and up 26% trailing three months as of this writing. It’s also super volatile (with an annualized standard deviation of 24%), partly because of its low 36% correlation with the SP500.
It matters because the ETF represents some of our core ideas, namely, it is: 1) country-specific; 2) its high volatility can enable a quick profit; and 3) it is always good to have some low correlation in a concentrated stock/ETF portfolio to dampen volatility at the portfolio level overall.
Here’s how we traded these advantages in this particular ETF for a 16% return in a ten-week window.
It began with a Bloomberg screen. We got a kick out of the September 18th post shared in the graph below.
While others were hedging the recent run-up in EWZ against all the sideways movement you see therein, we at Signals Matter came and went (long) swiftly and cleanly—and with a tidy profit.
Let’s look a bit closer.
We posted the buy Signal on July 21 … down at the bottom of the highlighted channel and then exited on September 29, about 10 days after Bloomberg published the article.
It’s a pretty crazy looking tape, no?
So how were we able to make such profits in such a quick time slot going long a security that otherwise tends to trade sideways and was beginning to show signs of exhaustion? The answers are pretty straight-forward.
*Anticipate
Because we understand that it’s what you book is all that counts. More importantly, and perhaps more proudly: we saw it coming.
*Fundamentals
First: we looked at some fundamental macro basics: Emerging markets in general were doing well during this period and Brazilian markets, in particular, had recently been boosted by: 1) local politics (helping the volatility), 2) rate cuts, 3) successful bond offerings, and 4) a bullish play on commodities–iron ore especially.
*Technicals
Second: we looked very carefully at the technical data. Although not shown here in our public blogs, EWZ broke out strongly to the upside in our proprietary trade channels in January and February of 2017.
This breakout put our Signals Watch tool on the lookout for a repeat spurt (i.e.: a less risky trade) which eventually arrived in Q3:2017.
This patient set-up is shown below:
Then we simply followed the stock up with a tight trailing stop until the price reversed on September 29, triggering a Signal to sell the stock, rewarding Signals Matter Subscribers with a tidy 16% gain over a 10-week period.
No worries. Signals Watch is a weekly publication of Signals Matter that showcases individual stocks and exchange traded funds that meet our rigorous technical and fundamental criteria for investment.
Why is Signals Matter important to you?
Smart investing is about living, not trading; about knowledge, not fear. That’s why we do the heavy lifting here at Signals Matter, why we signal the trade and why we manage the risk. All you do is pull the trigger, if you or your advisor are so inclined.
We built Signals Matter because we know that almost no one outside of a professional investment platform has the time, interest or resources to select, combine and derive sophisticated trade Signals as we do from our wide, essential spectrum of technical and fundamental filters.
Yet we know as well that anyone, including you, can deploy these tools if properly and simply condensed to an unpretentious and user-friendly dashboard of Signals.
To subscribe to Signals Watch (or to our Trend Watch and Recession Watch deliverables which keep an eye out for macro icebergs and opportunities ahead), visit our public Website which will go live in mid-November.
Thereafter, you can join our private community of investors eager to let their profits run, cut their losses short and generally navigate the choppy waters that lay ahead.
Be sure to visit our interim Blog site at www.SignalsMatter.com for candid talk about where we are, how we got here, where we are likely going … and why.
SIGNALS MATTER, LLC IS NOT A PROFESSIONAL OR LISCENSED FINANCIAL OR TRADING ADVISOR. NO INFORMATION OR OPINION HEREIN CONSTITUTES A SOLICITATION OF THE PURCHASE OR SALE OF ANY SECURITY. AS ALWAYS, PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
