Support For Russia Crumbling?
The Russian stock market is threatening to break down below a critical chart level.
No, this post has nothing to do with politics, diplomacy or international relations. In fact, you will not see the words hack, tamper, treason – or covfefe, for that matter -- in this post (at least after this sentence). Nor do you need to worry about any “fake news” here. We are only concerned about markets and truth. And in the markets, as they say, “price is truth”. And sometimes the truth hurts. That very well may be the case right now in Russian stocks.
After topping out in 2011, the Russian stock market was a global laughingstock for several years as the country went through some economically calamitous times. These tough times saw Russia’s currency, the Ruble, get decimated. This depreciation in the ruble, however, served to support the prices of Russia’s main local stock index, the MICEX. After bottoming in early 2014, the index would double in price by the start of 2017.
During a rally following the U.S. presidential election last November, the MICEX achieved another milestone. It was able to finally register a new all-time high near the 1970 level, eclipsing the former highs set back in 2008. After tacking on another 15% into January of this year, the index began to pull back. And by early March, it had pulled all the way back to test the breakout level at the former all-time highs.
Around the same time, we found the MICEX testing another key line on its chart. Since its inception in 2001, the MICEX has been climbing an Up trendline (on a log scale), including touches in 2008, at the early 2014 low, in December 2014 and January 2016. By mid-April, the index had pulled back to test the trendline once again. After threatening to break down below the trendline, the MICEX would bounce into early May.
The MICEX was not able to sustain the rally, however, and it would quickly drop back to test the trendline one more time. And late last week, as the trendline was meeting up with the former highs at the 1970 level, the index would suffer a clear break down below the trendline.
So should this breakdown have investors Russian for the exits? The breakdown does appear to clinch the notion of a post-election “false breakout”. Such false breakouts can result in powerful and painful losses once they reverse and break support, as we are seeing now.
As we note in a premium post at The Lyons Share, however, there may be a glimmer of hope -- though, perhaps a long shot -- on the MICEX chart. Additionally, since the MICEX is priced in rubles, it makes it cumbersome for U.S. investors to get exposure, long or short. Thus, we we also take a look in the post at U.S. Dollar-denominated instruments covering Russian equities to see if, and at what level, they may provide an opportunity for investors.
If you want this “all-access” version of our charts and research, we invite you to check out our new service, The Lyons Share.
Disclaimer: JLFMI’s actual investment decisions are based on our proprietary models. The conclusions based on the study in this letter may or may not be consistent with JLFMI’s actual investment posture at any given time. Additionally, the commentary provided here is for informational purposes only and should not be taken as a recommendation to invest in any specific securities or according to any specific methodologies. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.
