Are the BRICs Ready to Fall?

by: Andy Abraham

Do you know how to say "irrational exuberance" in Chinese? Or how about in Russian? Ok, maybe you know how to say in Hindi?...I am sure you can say it Portuguese?

We might not need to …investors and hedge funds have been throwing money at these markets for years, and why not. Look at the amazing moves. However, many local investors of these markets are very young and have, for the most part, never experienced a bear market. How many of us investors went through the tech bubble or this fun real estate blowup. Yet so many of us have been investing in the BRIC ( Brazil –Russia-India- China) ETFs again without even thinking what we might lose.

I really do not need to explain to you about the risks - maybe you can tell me about all the money you have made. I am not even going to stress the banking crisis...or the residential home crisis… or even mention the SIV crisis.

I am not suggesting to any degree that you exit your long positions on the BRIC ETFs. You know what you are doing; you have a plan. You know exactly when to exit your position. How many of you remember Japan of the late 1980s. At 25,000 was the Japanese stock market overvalued? Or how about at 30,000…or even 35,000…until peaking at 39,000 and still 18 years later not even at half of that. When the US stock market crashed in1929 crashed it took almost 25 long hard years to get back to those levels. I have never met anyone who could call a top to a parabolic move. That is what is happening currently in the BRIC ETFs.

Consider this on the Indian stock market; the journey from 19,000 to 20,000 points took 11 trading sessions and an increase of just 5.25%, whereas back in 1992, the journey from 3,000 to 4,000 took 22 trading sessions and an increase of 33.33%. We can go look at each component of each BRIC market. But what will that tell us? Human nature never changes. It does not matter if we are Brazilian, Russians, Indians or Chinese or American - the basic attributes of humanity become very clear. FEAR AND GREED!

I am very confident that all of us have heard the fantastic growth stories that are prevalent in the BRIC markets, but one needs to take a long term perspective while investing. Investing in the stock market is not a one-day event. That would amount to gambling and we are not gamblers (right?). In order for long term success one needs to have an exact plan as to when to purchase and when to exit, as well as a plan to invest consistently over a long period of time. There is no right time to enter the market. Every day is the right day. If you start investing in the stock market, you should be committed to be in the market for a long time.

One might construe this post as double cheeked. However, what I would like to stress is that one needs a plan regardless of if they consider themselves an investor or a trader. No one has a crystal ball where any market is headed However, a possibly significant sign is at hand on the BRIC markets. On a technical basis the chart is showing a MAJOR DIVERGENCE, which, many times, has been a forebear of a major trend in change. The risks of investing in the BRIC ETFs are greatly enhanced. One needs a plan and more importantly the mental discipline to follow the plan.

Disclosure: Currently we are not long nor short any of the BRIC ETFs but looking to go short.

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