The Brazil News Index-Faster is more sensitive to changes in news and attempts to produce more and earlier economic inversion signals. Here, we compare the Faster Index to the EWZ, which is the USD ETF of the Brazilian equity market. The general conclusion is that the Faster Index identifies important equity market turning points. The fact that this was such an extremely volatile period makes this an impressive feat.
Chart 1: Brazil News Index-Faster compared to EWZ (USD ETF of Brazil)
This equity bull market in Brazil was so massive from 2002 to 2008 that the nominal scale makes some of the movements difficult to see. Perhaps a logarithmic would make it easier, which is shown here.
Chart 2: Brazil News Index-Faster compared to EWZ (USD ETF of Brazil), log scale
The Faster Index hit its first low at the very end of 2001, which more or less coincided with the officially recognized end of the US recession. It also bottomed slightly before the US News Index that we showed in a previous post. Assuming an investor had access to these news indices at the time, such a confirmation of both hitting significant lows around the same time could have been used as a significant signal that perhaps the worst was coming to an end.
Interestingly, the Brazilian stock market proxy (EWZ) made a new low, which eventually was confirmed as its bear market low, in late 2002. At this time the news index produces a massive positive divergence which likely would have been seen by an investor as an extremely supportive signal. The News Index quickly trending to its maximum in early 2003 can be seen as a ‘kickoff’ move – a term sometimes used by technical traders that highlights usually an oscillator spiking higher in an abrupt manner and potentially could signal a longer term trend change which in this case would mean the end of the bear market.
From that point, EWZ began its journey upwards – a multi-year bull market which some see as part of a larger Emerging Markets equity bubble. Intermediate equity peaks in early 2004 and 2006 nicely coincide with peaks in the News Index. Used in conjunction with other indicators, such peaks could have been used for timing market positions.
For all its impressive calls, this index does make some less than perfect calls as well – highlighting again the fact that no indicator, metric or time series is a panacea. The way this particular index is constructed makes it more apt to act as an oscillator, with a tendency to alert ‘overbought’ and ‘oversold’ conditions. Such indicators often work fabulously well … except when they don’t. Again, you can say this about many economic or financial market indicator. As previously stated, this index should be used in conjunction with other data to improve the overall information flow and analysis of conditions.
The News Index, near Brazil’s equity bull peak, produced multiple negative divergences. An investor could have used this information as perhaps a confirmation of the RSI or other indicators showing the bull market was weakening. An economist could have used this information to highlight the marginal weakening of the news implying the expansion was losing steam.
The end of long bull markets can be very frustrating for experienced professionals as they sense things are not right but still see the market pushing higher. A novel indicator like the News Index that is based on different data (exclusively on text) and on a different form of analysis than traditional indicators but offers similar (confirming) insights could be extremely useful during this end of bull market phase. The simple fact that multiple indicators (including this index) were flagging obvious divergences would have likely been enough to make investors question the excesses and even perhaps begin to change strategy.
The next major signal appeared in early 2009, as the News Index appreciated off of its extreme low. This more or less coincided with the equity bear market low. The News Index moving up off of such an extreme low does not mean in this example that news had turned ‘positive’, simply that it started to become less negative.
Would we have known that a massive equity bounce would ensue throughout 2009? No. However, given the collapse in equity prices and the extreme news reading, any significant improvement would be an excellent sign that getting back into the market could be worth the risk. Again, we are not saying that this News Index should be used in isolation. In fact, using it in conjunction with other economic and market indicators seems to be the sweet spot.
Another point to recall is that once you have News Indices from different countries, you can use them for confirmation, especially around important turning points. This, conceptually, works with many other indicators as well. If an economist sees business confidence bouncing off of a major low, he might look to similar indicators in other countries for a confirmation which would add weight to his initial observation. In the case of the news, the US and Brazilian indices both hit extreme lows in late 2008 and started heading higher in early 2009. The fact that they paralleled eachother right around significant extremes could have easily been used as a confirmation that a major sea shift was occurring.
EWZ moved quickly higher during the remainder of 2009. The News Index did an excellent job at not only identifying the low in early 2009 but then moving higher throughout 2009. Generally, this period of a major economic and equity bounce off of a crisis or recession low seems to be a strong point for news analysis. This observation shows that at least this particular news time series is used as a type of contrarian indicator. It implies that investors should be looking to buy equity when the news indicator starts to come off of its extreme lows. In other words, investors should be ready to turn bullish just as news flow starts to become slightly less negative. Good traders seem to intuitively know this – the News Index can help to pinpoint timing around such lows and then help to ride this wave higher.