Brazil, Where a Buy Signal's Not Always a Good Time to Buy

  • So-called golden cross is normally a bullish technical sign
  • Amid political turmoil, many market watchers say wait and see

Brazil’s benchmark equity index is nearing a technical cue that normally shouts “buy" to investors. But in one of the world’s most volatile stock markets, the conventional wisdom doesn’t always hold.

The Ibovespa’s 23 percent advance this year is pushing the gauge toward a so-called golden cross -- formed when the index’s 50-day moving average crosses above its 200-day trend. Because the shorter-term measure reflects recent price actions, it’s typically seen as a sign that a bull market is just getting started.

The problem is that Brazil’s rally has been fueled not by a meaningful change in the economic outlook, but by speculation that a new government will swoop in to fix a range of problems that plague the country’s finances, said Raphael Figueredo, a technical analyst at brokerage Clear Corretora. But even in a best-case scenario, Brazil’s turnaround won’t be easy. The process to impeach President Dilma Rousseff on allegations she used accounting trickery to mask a budget deficit may take months -- and a change in administration would take even longer. In the meantime, Brazil is stuck in its worst recession in a century, inflation is running at almost 10 percent and the budget gap has exploded to levels not seen in at least two decades.

"The textbooks say that the golden cross is a time to buy -- that’s how it works everywhere,” Figueredo said from Sao Paulo. “But in Brazil, all that shines is not gold, especially right now."

The 50-day moving average was less than 0.1 percent below the 200-day line on Thursday, data compiled by Bloomberg show. The Ibovespa was little changed at 53,144.76 at 10:36 a.m. in Sao Paulo.

Since 2012, the Ibovespa has showed golden crosses and their opposite -- death crosses -- with very short intervals between them, Figueredo said. That indicates that investors may be better off taking their cues from the economy than technical movements, he said.

"It’s positive for investors that the golden cross is forming,” Figueredo said. “But I wouldn’t say it’s time to start looking for more opportunities to buy just now."

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