Europe Debt Concerns

Please click here for an enlarged chart of Ishares Msci Brazil ETF (NYSE:EWZ).

Note the following:

  • The chart shows EWZ leaped above zone 1 on election results.
  • RSI on the chart shows EWZ is overbought.  An overbought ETF is susceptible to a pullback.
  • Brazil matters to U.S. investors because it is Latin America’s largest economy and a major supplier of oil, iron ore, soybeans, and critical minerals.  Its economic policies are connected to global commodity prices, U.S. inflation, and corporate profit margins.
  • Brazilian stocks are surging as investors price in a greater chance of spending cuts, privatizations, and lower taxes following Flávio Bolsonaro’s stronger than expected election performance.  Bolsonaro, the candidate of the right wing Liberal Party, received approximately 47% of the vote against President Lula’s 45%, setting up an October 25 runoff with the presidency still undecided.
  • Flávio Bolsonaro’s father Jair Bolsonaro was previously president of Brazil and very close to President Trump. Jair Bolsonaro is now in jail.
  • In our analysis, if Bolsonaro wins the runoff election, Brazil will likely again be closer to the U.S.  If Bolsonaro wins, it will be good for U.S. strategic interests and a negative for China.
  • Under Lula, Brazil has deepened ties with China, its largest trading partner, and disagreements with the U.S. over trade and security have widened.  Brazil also belongs to BRICS, the group that includes Russia, India, and China.  BRICS promote greater use of local currencies in trade to reduce dependence on the U.S. dollar.
  • Brazil ETF EWZ is in our portfolio. We have continuously followed Brazil for 19 years.
  • Brazil has enormous potential but has repeatedly undermined it through poor economic management.  In our analysis, if Brazil gets its policies right, Brazilian stocks and Brazil ETF EWZ can go much higher.
    • Persistent budget deficits have contributed to high borrowing costs, while political interference in companies such as Petroleo Brasileiro ADR Reptg 2 Ord Shs (NYSE:PBR) has damaged investor confidence under governments of both the left and the right.
    • Credible spending discipline and predictable business policies could create room for lower interest rates and stronger corporate earnings.
  • Further in our analysis, EWZ can benefit from rising earnings and higher valuations, with a stronger Brazilian real potentially adding to returns in dollars, provided Brazil follows through with lasting reforms.
  • Concerns are mounting for France’s debt.  Earlier today, yields on French 10 year bonds were 146 bps above German 10 year bonds.  This is the highest yield difference since the 2011 Europe debt crisis.  The euro is slumping.  The euro is the largest component of the dollar index.  As a result, the dollar is rising.  Prudent investors should keep a careful eye on French debt as it has the potential to quickly mushroom and impact markets in the U.S. 
  • There is also an unconfirmed report of plague spreading in Russia.  It is nothing to be concerned about at this time, but it is worth keeping an eye on.  You may recall that we were one of the first, if not the first, in 2020 to warn that the stock market would fall because of COVID.
  • Iran is saying that it will close the Strait of Hormuz until the U.S. meets its conditions.  Iran also appears to have increased the tax on ships.  So far in the early trade, both the oil and stock markets are ignoring Iran developments.
  • FOMC minutes will be released on Wednesday.
  • Earnings season starts this week with Delta Air Lines Inc (NYSE:DAL) reporting on Friday and more reporting next week.  The stock market is expecting very strong earnings.  In our analysis, the probability is high that earnings will be strong.   Having said that, there is significant downside to the stock market if earnings do not measure up.

Magnificent Seven Money Flows

Most portfolios are now heavily concentrated in the Mag 7 stocks.  For this reason, it is important to pay attention to early money flows in the Mag 7 stocks on a daily basis. 

In the early trade, money flows are positive in NVIDIA Corp (NASDAQ:NVDA) and Microsoft Corp (NASDAQ:MSFT).

In the early trade, money flows are neutral in Amazon.com, Inc. (NASDAQ:AMZN).

In the early trade, money flows are negative in Apple Inc (NASDAQ:AAPL), Meta Platforms Inc (NASDAQ:META), and Tesla Inc (NASDAQ:TSLA).

In the early trade, money flows are negative in SPDR S&P 500 ETF Trust (NYSE:SPY) and Invesco QQQ Trust Series 1 (NASDAQ:QQQ).

Momo Crowd And Smart Money In Stocks

Investors can gain an edge by knowing money flows in SPY and QQQ.  Investors can get a bigger edge by knowing when smart money is buying stocks, gold, and oil.  The most popular ETF for gold is SPDR Gold Trust (GLD).  The most popular ETF for silver is iShares Silver Trust (SLV).  The most popular ETF for oil is United States Oil ETF (NYSE:USO).

Bitcoin

Bitcoin (CRYPTO: BTC) is range bound.

What To Do Now

Consider continuing to hold good, very long term, existing positions and add tactical positions based on signals.

The Arora Report is known for its accurate calls. Most recently, we correctly called the rally from recent stock market lows and the 2026 semiconductor decline before a 25% drop in the Semiconductor ETF (SMH). In gold, we bought at an average price near $1,105, close to cycle lows, and took partial profits near $5,400, close to cycle highs. Please click here to get our free forever Generate Wealth Newsletter. 

Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.