Shorting Oil Sensitive Emerging Markets

Coming off record one-week gains, oil has gotten a bit of a hangover this week and is off almost 2%. The rally last week once again was based largely on rumors of an oil output freeze that has yet to materialize. We believe that oil’s run for the short term has matured.

Moreover, we believe there is downside risk right now for such assets as we head into a traditionally weak time of the year for them. Given the energy data showing large build-ups in inventories this morning that are pressuring crude prices today, we want to hold off on a direct trade until we get a more favorable entry position.

That said, we are seeing opportunity in the more sensitive emerging markets that are oil-sensitive and have had tremendous performance this year. We believe they are at risk from both the decline in oil so far this week and the poor seasonality environment coming into the fall months.

With this situation in mind, when you receive this alert, buy to open the Market Vectors Russia ETF (RSX) November $18 puts (RSX161118P00018000) that last traded at 76 cents and expire Nov. 18. Also, buy the ProShares UltraShort MSCI Brazil Capped (BZQ), which seeks daily investment results, before fees and expenses, that correspond to two times the inverse (-2x) of the daily performance of the MSCI Brazil 25/50 Index. The pairing of these two trades will benefit from a pullback in two emerging markets, Russia and Brazil, which both are sensitive to the price of energy. Those markets also are showing high volatility and are very stretched from a price perspective.

Sincerely,

Doug and Tom