Editor’s note: This article was first published in December 2012. The market commentary is from 4 December 2012, including 150,000 jobs lost in November, 26% unemployment, a risk premium below 400 points, IBEX 35 levels of 7,500 and 8,200, talk of a Spanish bailout and the short-selling ban.
Plenty of analysts still can’t explain why the stock market hasn’t collapsed already (and I count myself among them), because wherever we look, however optimistic we try to be, all we see is destruction and zero creation. It doesn’t matter whether we’re talking about economic growth or job creation: we’re failing both subjects.
José Carlos Díez, chief economist at Intermoney, has given his view of the current situation (reported by Estrategias de Inversión), and his words are anything but reassuring. In essence: he hopes every alarm bell starts ringing, because we are heading straight for an economic disaster. According to Díez, Social Security enrolment figures show that 150,000 jobs were lost in November, the worst figure since 2008, which points us towards the same depth of depression as after the collapse of Lehman Brothers.
And the numbers now are far more worrying, because back then unemployment was below 10%, whereas this time we’re starting from 26%. Díez says that with current policies we can’t meet the targets for this year or next, and he is calling for forceful action by the European Central Bank in the markets, because there are solvent companies that can’t get financing.
Of course, the Government could still meet its deficit targets, and in my view that would be a very bad sign for the Spanish economy under the current economic policies, because the target would be met at the cost of the economic enslavement of Spanish citizens.
If we turn to the technical side, things don’t look any better: the indicators are giving signals that warn of a brutal fall.
José Luis García, stock market analyst and writer at EnBolsa.net, offers his own reading of the markets based on volatility indicators. The VIX, the VIBEX and the Eurovix all show a clear sign of extreme investor confidence. So far, the reading is positive. But if we apply contrarian theory, when these volatility indices are at their lows what we actually have is a clear sign that the market is overbought, and markets rarely keep rising from there.
To put this in perspective, the last time the volatility indices sat at their lows was a few months before the financial crisis. García says the index predicts what is going to happen, although it’s hard to predict when, since as a rule the indicator can stay at its lows for weeks, or even a few months, before the fall begins.
In this case, given the time of year, both analyses, technical and fundamental, lead us to the same place.
On the one hand, the risk premium has dropped below 400 points just as the situation is worse than ever, unless the market is already pricing in a bailout for Spain. That’s dangerous, because once the temporary Christmas contracts end and we see the 2013 unemployment figures, we’ll be holding our heads in our hands.
As for the volatility indicators, they are probably reflecting confidence in the Christmas rally that statistically tends to happen, and in 2013 our stock market may begin a sharp fall. If the ban on short selling is lifted, that fall could take us close to the lows already reached.
We have the fundamentals and the technical analysis, but we mustn’t forget common sense. Mine tells me there is a 90% chance that the IBEX breaks through the 7,500-point support and a 10% chance that it manages to clear the 8,200-point resistance, something that could happen very briefly thanks to the Christmas season. And let’s not forget that Christmas doesn’t last long.
As we always say, anything can happen on the stock market, so it is only an option for investors who are prepared to keep a close eye on their portfolio and manage it actively.
Featured image: Ross, CC BY-SA 2.0, via Wikimedia Commons.
