Emerging Troubles for Developing Markets

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You would have to be Rip Van Winkle to have missed the news of growing global unrest over the past couple of months. The violence is spreading and intensifying as embattled leaders employ desperate measures to preserve their positions of power.

The cause of this social unrest well documented. People living in third-world countries (and emerging markets) spend approximately 50% of their income on food. With food prices rising fast, millions of lives are being threatened. People are getting restless, and for good reason.

Inflation can easily be described as the rising cost of goods that we use and buy every day. Inflation is growing rapidly in many emerging market countries. Besides food, the costs of heat, gas and many other basic staples are skyrocketing.

With today's broad array of social networking options (Facebook, email, Twitter, etc.), likeminded people have the ability to quickly organize rallies to demand change.

Chinese President Hu Jintao last Saturday called for stricter government management of the Internet and warned top Communist Party leaders that China was facing deepening social conflicts that would test the party's ability to maintain firm control.

I recently discussed the ProShares UltraShort FTSE China 25 ETF ( FXP), which corresponds to 2 times the inverse of the daily performance of the FTSE China 25 Index. FXP rises as the Chinese markets decline. It is a leveraged fund and therefore carries more risk than many other ETFs.

FXP gapped up yesterday on almost 4 times its average daily trading volume, closing at $32.09. There may be some resistance at its recent high of $32.95 and its 200-day moving average at around $34. Should FXP clear those levels, it could see a near-term run up to $39.60.

Since early November, FXP has established a pattern of higher lows and higher highs. With these global problems still in their early days, China could face difficulties on many fronts (rewarding investors in FXP). For protection, place a stop at $28.75.

Brazil is another emerging market that's showing signs of weakness. Brazil is the largest Latin American country, ranking fifth in global population. It is the eighth-largest economy in the world. However the chasm between the rich and poor in this country is wide.

Though Brazil's economy has been booming due to the country's rich supply of natural resources, its stock market appears to be showing signs of fatigue. The ProShares UltraShort MSCI Brazil ( BZQ) may be bottoming out and starting a new uptrend, and this could spell trouble for Brazil's developing economy.

It appears that a double top has formed in the MSCI Brazil Index and that the uptrend, which dates back to December 2008, is breaking down. BZQ will face resistance at $18.21 and at $20. Those price points are 8.5% and 19% higher than yesterday's close of $16.77. If it does clear those levels, $23 would be the next target for BZQ. Use a stop at $15.25 for protection.

Developing countries have attracted investors since the market bottomed a couple years ago. But what goes up must come down. Trouble is brewing for China and Brazil, and there's a chance that the markets of these two global leaders could take downward turns. If that happens, FXP and BZQ could be at the beginning of their respective uptrends.

At the time of publication, Slusiewicz was long FXP.

Jerry Slusiewicz has over two decades of professional investment experience. He has worked with individuals and institutions to manage monies for both short and long-term investment horizons. This extensive experience through various stock and bond market cycles enables him to offer a unique blend of professional investment counsel and personal service.

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