The Exchange

Russia's stock market breakdown is a total disaster

J.C. Parets is the founder and president of New York based hedge fund Eagle Bay Capital, LLC. You can find his smart commentary at AllStarCharts.com.

Speaking of underperforming emerging economies, let’s turn our attention to the massive breakdown this week in the Russian stock market. This one has been a disaster for years, not a secret, but now we have an even bigger problem.

I hate to keep picking on the emerging markets, but things continue to get worse out there both on an absolute and relative basis. Today let’s focus on the train wreck that is Russia. First, let’s put things in perspective to show how bad things have been in Russia for years. This is a chart comparing the Market Vectors Russia ETF (RSX) to the S&P 500 here in the US:

We’re seeing fresh lows in Russia vs US and we shouldn’t be surprised. The underperformance here is nothing new.

Here is a weekly chart of the RSX breaking critical support that goes back to 2011. This is a big problem now because any rally attempt will be met with that overhead supply.

And finally, here is a shorter-term look at the daily candlesticks.  We had been consolidating in this descending triangle pattern for the past couple of years. Notice the failed breakout in October. Isn’t that beautiful? Just another great example of, “from false moves come fast ones in the opposite direction”:

This is a massive breakdown in Russia. Emerging markets as a group are a disaster, hitting fresh 8-year lows today relative to the USA. But within the EM space, Russia is and has been one of the worst of the group.

As always, we want to have a plan. What sort of scenario could change our minds about a continued bearish stance on Russia? It’s going to be tough, that’s for sure. But I would need to see prices back above this broken uptrend line from 2012. I think this is an extremely unlikely scenario and continue to be a seller of any and all strength. But we do have to keep an open mind, right?

The path of least resistance in Russia is lower. Period.

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