Editor’s note: This article was first published in August 2013; the IBEX 35 highs, supports, targets and downside levels it cites reflect the market at that time, and its scenarios for 2013–2014 have expired.
When it comes to analysing the IBEX 35, there is nothing but difficulty: technically it could be setting up for two completely opposite scenarios, and on the fundamentals it would be another story altogether.
Technically, the IBEX 35 made a slightly higher high this August by breaking above 8,800 points, albeit on low volume and quickly losing key support levels again. We are now approaching an area that should act as support, at 8,240 points (the 200-session moving average). If the index manages to hold that area, the possible scenario could be a return to the highs (8,820 points), with an eye on breaking above them and even topping 9,000 points. If that scenario played out, we could talk about a genuine uptrend in the index, one that could take it as far as 10,000 points.
Conversely, if the 8,240-point support is lost, we could see a return towards 7,500 points, and we would pray that it held there.
*Neither scenario would really make sense, and the logical thing would be for the IBEX to keep moving sideways because, as we have said on several occasions, there are no reasons for it to break out either upwards or downwards. That said, if we look at the real fundamentals, a downward scenario would probably make more sense.
A warning about Spain
A lot of the data is being dressed up, and we are underestimating the true and only indicator that shows the health of an economic system: employment. We have already ruled out the worst possible scenarios for Spain, and perhaps we shouldn’t have, especially considering that the IBEX is one of the most bank-heavy indices in the world, and its companies carry some of the highest debt levels.
If Spain does not manage to create jobs in the medium term, drastic measures will probably have to be taken. Since we cannot devalue our currency and the European Union would not help us (quite the opposite: Germany would tighten the noose we already have around our neck), we should not rule out that we may eventually have to consider leaving the euro. I know, it sounds crazy and it is a very unlikely scenario, but I wouldn’t rule it out, just as I wouldn’t rule it out for Greece or even Portugal.
So keep a very close eye on the unemployment figures, because I insist that in the end they are what calls the shots. The most extreme scenarios, the ones that do the most damage, tend to arrive just when positive news has been released and calm and complacency reign. The news breaks on a Friday after the market closes, and by Monday some people have lost the shirt off their backs.
And this scenario could come with the IBEX at 7,500 or with the IBEX at 11,500. In fact, it shouldn’t surprise us, because it has happened before.
Right now we are receiving exactly the same news that drove the Spanish index’s spectacular rise between 2009 and 2010. But in the end we had underestimated how harsh this crisis would be, and we went through one of the biggest bear markets in the history of the Spanish stock market, with some listed companies lost along the way. Now history is repeating itself. Perhaps this time will be different, but it might not be.
The question is… where will the index’s next turning point be in 2013 and 2014?
In short: as long as Spain is creating jobs, I think the IBEX should stay on its upward path, but if it fails to create jobs, we need to be ready for a completely pessimistic picture. This is just my personal opinion.
Featured image: Kippelboy, CC BY-SA 3.0, via Wikimedia Commons.
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