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Cramer is running a “Charts Vs. Fundamentals” series this week, highlighting the benefits, and the drawbacks, of technical analysis. Technicians use charts to study investor psychology, and that’s how they decide to buy or sell a stock. Cramer, on the other hand, has always made his calls based largely on the fundamentals, or the business behind a stock, as well as the overall macroeconomic environment.
Both ConocoPhillips [COP
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] and Potash [POT
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] got the royal treatment so far, but for Wednesday’s show Cramer wanted to use each school of investing to analyze a country, or, more specifically, a country-based exchange-traded fund. He chose the iShares MSCI Brazil Index [EWZ
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A look at the chart shows EWZ’s selling climax came a month before the index’s low in mid-November. Everybody who wanted out got out in October. So the eventual bottom in the low $30s had more to do with lack of buying than any increase in selling. Since that low, buyers have been more and more willing to purchase shares at higher levels. The lows, so to speak, aren’t as low as they once were. And in technical analysis, higher lows mean buyers are eager and sellers are less aggressive.
In EWZ’s case right now, the reduced volume indicates sellers are flat out exhausted. The Brazilian ETF looks to be “reverting to the mean,” which is technical jargon for the narrowing gap between EWZ’s current price and its average price over the past 200 days. The common wisdom among chartists is that once the price approaches that key moving average there should be some profit-taking, most likely around $50, $17 higher than the current price.
The fundamentals, however, tell a different story. Brazil’s economy is driven by natural resources. So when commodities are booming, so too is this country. But we know that commodity prices worldwide have plummeted. Weak demand for steel has down iron ore, a key Brazilian export, and those costs are expected to drop another 40%. Soybean prices are down 23%. Bunge [BG
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], which does a bulk of its business in South America, dropped 14% just Wednesday on negative news from the region. Brazil’s trade surplus lost 38% from 2007 to 2008 as well, and there’s the risk the budget surplus could soon become a budget deficit.
So while the chart may claim the Brazil ETF is a buy, Cramer doesn’t think so. He’d rather see investors buy a China fund, like the Xinhua China 25 Index [FXI
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] his charitable trust owns. China’s up 5% for the year so far, and the Communist Party there has shown a willingness to do whatever’s necessary to jumpstart its economy. And with the Baltic freight index up 50% in the last two months, Cramer’s confident in China’s growth prospects.
Join Cramer live in the studio for Mad Money: The State of Cramerica, a special town hall-style show on Wednesday, Jan. 21. Get your free tickets here!
Jim's charitable trust owns ConocoPhillips and the Xinhua China 25 Index.
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