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Bovespa Plunge Flashes Warning Brazil Shares May Head Lower

Bovespa Index Posts World’s Biggest Decline
Brazil’s benchmark stock index sank the most since May 2010, paced by declines in commodities producers, on disappointing earnings and growing concern the global economy is weakening. Photographer: Marcos Issa/Bloomberg

Brazil’s benchmark stock index, the biggest decliner among the world’s 20 largest markets yesterday, is the most oversold since just after September 2001’s terrorist attacks, according to an indicator used in technical analysis.

For Auerbach Grayson & Co.’s Richard Ross, a chartered market technician with 18 years experience, that’s a warning sign of further declines, not a signal to buy.

“When you get these oversold levels amidst the backdrop of a bear market it has to be viewed differently than when you get oversold readings in a bull market,” Ross, Auerbach Grayson’s global technical strategist in New York, said in a telephone interview. “It almost confirms the sell signal rather than piques my contrarian instincts.”

The Bovespa’s 14-day relative strength index, or RSI, sank to 18 yesterday, below the threshold of 30 that indicates fair value, according to data on technical analysis compiled by Bloomberg. The last time the RSI was lower was Sept. 14, 2001, three days after terrorists crashed two airplanes into the World Trade Center towers in New York.

The Bovespa, which entered a bear market on July 27 after plunging 20 percent from its 12-month peak in November, rose 0.3 percent to 52,949.22 today. The gauge yesterday sank 5.7 percent to its lowest closing price since July 17, 2009 on disappointing earnings growth and concern the global economy is slumping. Brazilian stocks have been showing signs of weakness for almost two years, Ross said.

“An RSI of 18 is a warning signal of just how weak the market is and how perilous things could be,” he said.

Index Climbs

In technical analysis, investors and analysts study charts of trading patterns and prices to forecast changes in a security, commodity, currency or index.

The Bovespa dropped 28 percent from last year’s peak through yesterday as inflation accelerated to the fastest since 2005 even after the central bank lifted interest rates eight times in 15 months.

Companies from Vale SA, the world’s largest iron-ore producer, to Itau Unibanco Holding SA, Latin America’s biggest bank by market value, have reported second-quarter earnings that missed analysts’ estimates. Itau’s profit was eroded after the company set aside more cash to cover an increase in bad loans.

HSBC Holdings Plc sees more defaults from consumers and small businesses during an upcoming “cooldown” of economic growth in Brazil, Emilson Alonso, the bank’s head for Latin America, said yesterday.

Slow Growth

Brazil’s retail default rate will be “a little” higher in the second half of 2011, he told reporters in Mexico City.

“Brazil is going to be a difficult place to make money in the medium term,” Michael Shaoul, chairman of Marketfield Asset Management in New York, said in a phone interview. His Marketfield Fund climbed 14 percent in 2010, beating 91 percent of peers, according to data compiled by Bloomberg.

“If we are right and Brazil is entering a period of slower growth, I think corporate profitability may disappoint for a number of months and quarters,” he said. “I don’t see this as a period of weeks. This will be a period of disappointments.”

Billionaire Eike Batista’s mining company MMX Mineracao & Metalicos SA rose 8 percent today after tumbling 16 percent yesterday while Petroleo Brasileiro SA, the state-controlled oil company, extended its decline, falling 2.3 percent to 20.18 reais, its lowest level since December 2008.

Steelmaker Gerdau SA gained 0.9 percent today after sliding yesterday the most since January 2009 after reporting earnings that missed estimates.

Bond Auction

The real strengthened to 1.5781 per U.S. dollar today. Yields on Brazilian interest-rate futures contracts due in January show traders are betting the central bank may cut interest rates this year for the first time since July 2009 on speculation the global economy is headed to a slowdown.

The Brazilian government failed to sell most of the fixed-rate bonds it offered at an auction yesterday on reduced demand for riskier assets.

After yesterday’s decline, the Bovespa traded at 8.6 times analysts’ earnings estimates, the lowest level since March 2009, according to weekly data compiled by Bloomberg.

The index rose 1 percent in 2010, its worst-ever performance relative to MSCI Inc.’s gauge of 21 developing nations’ stocks, after rallying 83 percent in 2009 as Brazil recovered from the global financial crisis.

The last time the Bovespa’s RSI was lower, on Sept. 14, 2001, the index surged 31 percent over the following three months. When the Bovespa’s RSI sank to 23 on May 20, 2010, the index rose 15 percent over the next three months.

This time, Ross says, the Bovespa is in a position of weakness rather than strength, having entered a bear market.

“It’s all about context,” said Ross, who correctly predicted last year that gold’s rally would continue. “This selloff is really an extension of a technical erosion that has been in the process for the past two years.”

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