Technical Thursday: BRIC’s look for direction

Brazil, Russia, India and China – collectively the BRIC countries – have under-performed the United States for the past couple of years.  An interesting reversal of globalization appears to be developing and it will prove to be quite interesting to witness these four nations as they face a new challenge: how to become a more self-sustaining economy.

Exporting among the the four still fuels much of the aggregate GDP.  But these countries are linked in no economic fashion.  They are joined together in investor consciousness only as an acronym.  Many lay people and unaware advisors and investors fail to recognize the mistake of taking them as a unit. This worked well in the first decade of this young century but may not be satisfactory moving forward.

I’ve expressed my doubt’s elsewhere regarding the future of the American economy.  I’ve postulated in writing my concerns that the US stock markets (typically I refer to the S&P 5000) may well peak again, much as they did in 2000 and 2007.  Given the relative under-performance of the BRIC’s to the S&P 500 and those countries dependence on the US economy this will be of concern for investors invested in BRIC mutual funds and ETFs.

Brazil, in the chart below the iShares MSCI Brazil Index ETF (EWZ, quote), may have bottomed in May.  Given its dependence on exporting its natural resources one may wonder if this interim bottom is merely investors getting in a tad early in anticipation of the as yet to materialize global recovery.

Compared to the SPDR S&P 500 Index ETF (SPY, quote) EWZ is trading lower than five years ago while SPY has regained much of its past glory.

Russia, represented by the Market Vectors Russia ETF Trust (RSX, quote), unlike Brazil is slightly higher on a year-to-date basis.

Although one might argue that RSX also bottomed earlier this year the chart remains intimidating. The reversal in September which brought the price back from $31.00 to about $27.00 may not be over. Even if the ETF is destined to go higher the bottom of the range could be revisited.

Over the past five years RSX looks worse.  While SPY has traded higher (green) since the financial crisis in a comfortable channel consisting of higher highs and higher lows RSX (red) can be interpreted as developing an aberration of a head-and-shoulders formation, a bearish indicator.

India has confounded expectations of many for years.  Although the opportunity is huge India-oriented investments have not performed up to snuff until recently.  EPI, the WisdomTree India Earnings Fund (EPI, quote) is up this year so far, increasing from around $15.50 per share to about $18.50 today.  

EPI may also have bottomed but like RSX it is trading in a very wide range.  EPI has only been existence since immediately after the bottom of the stock market in March 2009.  It is trading for a little more today than it was then.  

Finally the big dog, China.  FXI, the iShares FTSE/Xinhua China 25 Index ETF(FXI, quote) is also up on a year-to-date basis.  But the chart is difficult to interpret.

An argument can again be made that the ETF bottomed in June but the trading range is still very wide. China’s dependence on the US consumer, and therefore the US economy, will be a dominant influence on the ETFs future performance.  A reversal would bring the ETF back to the low-thirties and potentially beyond.  On a purely technical basis the ETF would need to find support near $36.00 per share and then trade through the high set earlier in the year at about $39.50 per share before one could confidently say the bottom is in.

The five-year chart comparing FXI with SPY shows similarities to the others.  FXI is higher now than immediately after the financial crisis but lower than before the crisis.  

Until these countries become less export dependent and more economically self-sustaining their fortunes will rest in the hands of the US economy.  Future growth opportunities abound in these markets but as with all developing countries, and too many developed ones today, the future is more than a little opaque.

Simply stated investors are going to need to dig a little deeper into these territories.  The old buy-and-hold approach will not work with the BRIC’s anymore unless of course a great global economic resurgence arrives to lift all economies simultaneously.  More than likely will be further volatility and lateral movement for these stock markets.  Caution is advised.  Keep reading Emerging Money for insight and analysis in emerging markets.