Sometimes, trading demands putting your own views aside and going with the odds. For those whose experience is based on the Hollywood version of trading as epitomized in “The Big Short”, that may seem like a strange thing to say. Most movies based on trading are stories of a plucky individual, convinced that a big move is coming, defying the negativity of all around them who follow the conventional wisdom, and emerging victorious (and very rich) after getting to the brink of bankruptcy. What Hollywood doesn’t tell is the far more common story of a trader who, convinced that they are right and the thousands of other very smart people who make up the market are wrong, loses millions by running a loser into the ground.
Of course, both of those are extreme examples. A far more common conundrum is that which I face now. I am, like most people who are paying attention, worried about global growth and the trade war. But, worry or not, the fact is that U.S. stocks overall have proved remarkably resilient. There have been wobbles such as we saw last week, but the major indices are still very close to all-time highs. That means that, whatever your long-term view, market weakness brings short-term opportunities.
There is just such an opportunity right now in Petrobras (PBR).
Regular readers of my musings will know that PBR is a stock that I frequently use to trade in both directions. Its pricing is complex, being subject as it is to multiple influences. The normal things that dictate stock moves such as economic conditions and prospects affect it, but so do the price of oil, the strength of the dollar, and political conditions in Brazil. That all results in extreme volatility, and that is a trader’s friend.
The last big move in PBR has been downward, as the trade and growth fears have been exaggerated by a strong move up in the dollar and a downward move in oil. That has resulted in the stock losing around a quarter of its value in just over a month, but there are both technical and fundamental reasons to believe that it is about to bounce.
From a technical perspective, the recent small bounce off the low comes after the five waves of a classic Elliott pattern have been completed, and the bounce, drop back and beginnings of another bounce that we now see indicate the start of another, but in the opposite direction. That recent bottom just below $13 and the December low around a buck lower also give logical levels off which to set a stop loss orders.
Fundamentally, the most significant move is likely to be in the dollar. The strength of the currency is a result of U.S. interest rates being significantly higher than those in most other developed countries, but that gap looks like it will start to close soon. Fed Chair Jay Powell’s speech at the Jackson Hole, Wyoming conference of global central bankers this morning did nothing to change the view that further rate cuts are coming, and if that is the case, the dollar looks overvalued at these levels.
A weaker dollar would give some support to oil prices and would also support stocks of companies based overseas. PBR, in other words, is looking at a double positive.
So, while my long-term view is still that the protectionist policies currently being pursued in the U.S. and elsewhere in the world to a lesser extent are misguided and dangerous, that is not enough to make me adopt the Hollywood hero approach and sell like crazy and wait for everyone else to see the light. Instead, I am looking for things that got hit hard in the recent drop and may bounce just as hard over the next few weeks. PBR fits that description so, with appropriate stop losses to limit the downside, looks like a viable trade from here.