Editor’s note: This article was first published in January 2013, as market commentary from 17 January 2013. The IBEX 35 levels (6,000 and 9,000 points), the overbought and low-volatility readings, rising unemployment in Spain and the short-selling ban ending that month (it ran to 31 January 2013) all refer to that moment.
The saying “better to be wrong and miss out on gains than to be wrong and lose money” applies here. Everything suggests the IBEX will correct soon, although at this stage a scenario in which our benchmark index goes back to 6,000 points is unlikely (unlikely, but it can’t be ruled out).
The question is whether it will correct once it reaches 9,000 points or take a breather before getting there. Either way, even in a very positive scenario, the risk isn’t worth it for anyone planning to build long-term positions. If we look at the indicators:
We have clearly overbought levels, together with volatility indices at their lows, which usually signals that volatility is about to rise. Not to mention that the situation is very similar to 2009, when a false start of a recovery took the index up to 12,000 points, a level that was later followed by lows of 5,900 points. It’s true that many of the uncertainties have eased, but I insist that the most reliable indicator of economic recovery in any country is the unemployment rate, and that is still going up. If that isn’t fixed, it will take its toll.
Technically, the primary trend of the IBEX 35 is still bearish, and the index is moving within a downward channel. It still needs to break through the top of that channel and then battle the strong resistance at 9,000 points.
“You’re more likely to make money investing near support levels than near resistance levels. And you make more money at the end of a downtrend than at the end of an uptrend.”
Another significant point is that many strong hands haven’t closed their short positions, so they’re hoping to see the index fall again.
The disappearance of extremely negative news tends to go hand in hand with bans on short positions. Why spread doubt if nobody makes money from it? The short-selling ban ends at the end of this month, so that needs to be taken into account.
Since nobody can predict what the market will do in the long term, although we can almost be sure it will correct in the short term, the smartest thing would be to wait for that correction and then take positions, but very cautiously.
Featured image: Zoilo Andrés, CC BY 2.0, via Flickr.
