Editor’s note: This article was first published in July 2012. This forecast was written on 30 July 2012, at the height of the euro crisis, with IBEX targets and Spain’s 25% unemployment. Draghi’s whatever it takes speech came four days earlier, the ECB announced its bond-buying programme in September 2012, and the IBEX closed 2012 at around 8,170 points.
Rockefeller used to say that when his shoeshine boy started buying shares, it was time to start selling, because the bubble was about to burst. Of course, the old investors (the dinosaurs of investing) also point out something else: in every recession, even people who know nothing about investing know that a “cheap market”, where shares are supposedly going for a song, hides an opportunity to make money from the expected stock market rebound.
In other words, Rockefeller’s shoeshine boy is now buying shares too, because he thinks there are enough signs that the market will rise. But… do we know what trend we’re in and where the stock market will head from here?
Unfortunately, we’re at a particular moment when neither technical analysis nor fundamental analysis works. It doesn’t matter where shares have their support, because a single piece of news could make the market behave as if Lehman Brothers had collapsed all over again, triggering a downward move that would set off every stop-loss. Or, on the contrary, if one of the expected announcements comes, we would see one of those huge rallies that come along only a few times in a lifetime. Neither fundamental nor technical analysis: right now everything depends on the ECB. Here are the 3 possible scenarios from now on.
Scenario 1
In this scenario, we would be looking at a feint or attempted rebound within a main downtrend.
European leaders fail to agree on the mechanism to contain speculation in the markets. The risk premium rises again and doubts about the eurozone’s recovery keep emerging, so the IBEX heads back towards 5,900 points (a support zone), before finally rebounding and starting a new rise towards 7,200 points. Whether or not it reaches that zone would again depend on the factors currently being considered.
Scenario 2
In this scenario, we would be looking at a change in trend, with the IBEX able to reach 8,000 or even 9,000 points.
The ECB finally steps in by buying debt, or through some other mechanism to help the troubled peripheral countries, with the support of the rest of the eurozone members. The talking ends and action begins. Speculators no longer have anything to do in Europe.
Scenario 3
This scenario would be a continuation of scenario two: the ECB calms the markets and we buy some time until September–October, when Spain reaches or far exceeds 6 million unemployed and the Spanish economy still isn’t growing. Bad economic data from the United States and China come to light.
European stock markets would turn red, and doubts would resurface about a eurozone built on austerity with negative growth. In this scenario, we could see the IBEX even below 4,000 points, since we would be talking about the recession many economists are expecting, which would expose a global economic collapse.
Note: None of these scenarios should be ruled out, especially number 3, because my mind can’t take in an index at 8,000 points in a country with 25% unemployment. So be very careful when investing in the stock market, and protect your position at all times with a stop-loss.
Featured image: JIP, CC BY-SA 3.0, via Wikimedia Commons.
