Buying Brazil and Selling Germany

One of the strategies that we like to implement to help achieve a low correlated portfolio is selling one stock and buying an equivalent amount of another. This gives us more of a neutral position in any given market. Today I want to talk about the shift that I'm seeing in money flow into Brazil and out of German stocks. This potential breakout could be the beginning of a powerful new trend.

The first chart shows the last two years of performance for each of the two country ETFs: $EWG for Germany and $EWZ for Brazil. Look at the massive disconnect between the two. While developed markets have done great since the summer of 2012, Brazil has struggled with a lot of the other emerging markets:

Brazil has gone nowhere in two years while Germany is up over 60%. This next chart shows the ratio of the two ETFs breaking a key downtrend line and now attempting to break out. This looks to me like the beginning of the first higher high to go with the higher low in early June:

This gray shaded area represents former support from last summer that has been resistance since April. After some consolidation, it appears as though this breakout can be for real. We really only want to be long this pair above that shaded area. Below there and things get messy. But if we're right on this one, there is still plenty of upside left in this thing.

No one is talking about this shift in money flow out of Europe and into Latin America. On a relative basis, I'm really starting to like this. It also helps keep us more neutral in global equities, which we prefer right now.

Target-wise, I'm looking at that 2.15 level as the first stop. We can go higher than that, but let's get there first and then reevaluate the situation. This represents about a 35% upside potential with a very fixed, well-defined amount of risk. We like that.

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Tags: $EWZ $ILF $EWG $FEZ $EUFN