The Brazil Bloodbath – A Few Comments

Brazil stocks, government bonds and currency suffer large one day losses last week on bribery allegations against their pro-business president. Markets, not liking this too much, quickly sell and the Brazil stock market finds itself limit-down; the currency (Real) down 6% and bonds down ~4%.

1) If you invest most of your money into one country, you put yourself at risk of a Brazil-like event wiping out a good chunk of your cash.

2) In the event of an event like this, and you see your accounts down 10-20% in an instant, do you know what to do? Do you have a plan for handling this? Or do you just let it ride and expect to be bailed out by a rebound?

3) Reading headlines, without a rules-based plan in place, can scare you out of your investment – possibly near the bottom of the move. In the U.S., this occurs most recently in late 2008-09.

Waking up to this headline might influence you to run over to your brokerage account and quickly sell your Brazil investment. You can substitute “Brazil ETF” for any stock or other market you may invest in. The headline itself zeros in one data point – today’s price.

But how does this one-day crash look in the big picture?

A nasty drop for sure, but when you pan out to a 5-year chart it doesn’t look as bad.

How would a long-term trend follower handle this?

In this case, I wouldn’t do anything; EMAs still indicate an uptrend so I’d stick with it. Only when the 20-day EMA (red) crosses below the 60-day EMA (green) would I sell out. Until then, though, take the one-day loss on the chin and stick with the position; don’t let the headlines influence your discipline.

A short-term trend follower might exit this week as the EMAs now indicate a downtrend.

Three Points to Remember

1) All-in bets come with major risks.

2) If you do go all-in, then you’d better have a way to manage the risk when volatility kicks up.

3) Use strict rules to determine when you get in and out of markets or stocks; headlines don’t count.




Past Performance is Not Necessarily Indicative of Future Results

There is always a risk of loss in futures trading.

This communication is for information purposes only and should not be regarded as an offer to sell or as a solicitation of an offer to buy any financial product, an official confirmation of any transaction, or as an official statement of Melissinos Trading LLC. All information is subject to change without notice. These charts show examples of trends. Inclusion of a chart as a trend example does not imply any kind of recommendation to buy, sell, hold or stay out.

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