Are China and Brazil Showing the Way for U.S. Equities? Maybe, but let’s Focus on an EWZ Breakdown first….

by Dan May 24, 2011 10:05 am • Commentary

Brazil and China have been tightening monetary policy since mid last year when the U.S.  Fed had indicated it would enter into its second stage of quantitative easing in late summer….

Chart below shows the performance of the EWZ (etf that tracks Brazil’s stock market) and the FXI (etf that tracks the Chinese stock market) vs the SPY

[caption id="attachment_2155" align="aligncenter" width="300" caption="1 Yr FXI and EWZ vs SPY   chart provided by Bloomberg LP"][/caption]

-What sticks out to me about this under-performance is how obvious it is and how potentially obvious it will be that our markets (Europe as well) will be in for a rocky period at the end of our easy money policy….

-China and Brazil are also now subject to the double whammy of potential slowdown in growth, coupled with tighter monetary policy…..which seems similar to what we face…..

But I want to focus on Brazil for the time being as Technically it seems very vulnerable….I want to look for a low premium way to target a break below that key 10 month support level of 70.

[caption id="attachment_2156" align="aligncenter" width="300" caption="1 YR EWZ Chart Provided by Bloomber LP."][/caption]


TRADE: EWZ (71.95) June 70/68/66 Put Fly for ~.20

Buy 1 Jun 70 Put for 1.20

Sell 2 Jun 68 Puts at 1.40 (.70 each)

Buy 1 Jun 66 Put for .40

Break-even on June Expiration:

-70 or above lose .20

-btwn 70 and 70.20 lose up to .20

-btwn 69.80 and 68 make up to 1.80

-at 68 make 1.80

-btwn 68 and 66 payout trails off

-66 or below lose .20

TRADE RATIONALE: This is not a high conviction trade as it is all a bit macro but I think the market is at an inflection point and looking to make some low premium bearish bets in places that look vulnerable……Technically you could look at the EWZ chart with differing views… has held 70 for 10 months and likely to continue to do so….that said I think the more dramatic move is likely to be once it breaks that level….Timing in this sort of trade is difficult and picking strikes aint any easier….sweet spot for this trade is down ~5%….