The reaction from the eurozone and the United States about Russian President Vladimir Putin’s three-dimensional chess match has so far has been limited to sanctions against individual Russians, which is about as mild as you can get. Market reaction was therefore buoyant, as it appears that a re-ignition of the Cold War has been averted.
Still, let’s not kid ourselves. The situation remains a significant overhang, as no one has been able to predict with much confidence what the Russians are planning for the future. There are several imaginable scenarios that could bring instability to the markets, at least for a short stretch.
So far, Ukraine has been restrained in its response to Russian aggression, but a quick annexation of Crimea by Russia could force Ukraine to take action and for the eurozone and U.S. to respond with stronger measures. Worse would be Russia sending forces into eastern Ukraine to “protect” ethnic Russians — a similar excuse was used for the invasion of Georgia in 2008.
It’s no surprise that with the geo-political uncertainty brewing, I’ve got some short-side plays open right now for my Trader’s Advantage members if the markets start to react adversely. But for my most recent short-side recommendation, we’ll have to move away from Russia and Ukraine and look to another part of the world: Brazil.
Petroleo Brasileiro (PBR) is the largest integrated energy producer and wholesaler in Brazil. The Brazilian economy is on the skids right now for a variety of reasons, including inflation, corruption and a focus on short-term events like the World Cup in favor of longer-term plan, and Petroleo Brasileiro stock is leading the way lower as you can see in this chart:
Petroleo Brasileiro stock has been on a steady descent since the beginning of the year, and its technical picture indicates it has further to drop. While I rely more heavily on chart analysis, for those interested in the fundamentals, estimates call for negative growth for the current quarter, as well as the next quarter. Analysts’ EPS estimates have dropped 24% in the past 30 days alone.
I recommend shorting (selling to open) PBR at a $10.45 or more. Petroleo Brasileiro stock is essentially in free fall now, with virtually no major chart support available. Set up to cover half of the position at an initial target of $10.10. A drop to this level would provide traders with a quick 3% move.
When you short a stock, you’re essentially “borrowing” those shares from your broker to sell onto the open market, which means you’re on the hook to buy back and “cover” the shares. For this reason, I tend to short lower-priced stocks and to keep very conservative targets on them. It doesn’t pay to be greedy when you’re trading on margin.
I also like to mix in options trades with my stock positions, and you could certainly buy put options as a surrogate for shorting PBR, but the week of options expiration typically carries increased volatility, so my preferred strategy around the third Friday of the month is to short the common.