The global economy and the uptrend in developed-world stock markets since early 2009 are in danger. The possibility of a collapse in the Eurozone is creating enormous uncertainty and contributing to slowing growth well beyond its borders, including in both the UK and the US. A co-ordinated effort from the Eurozone’s stronger members, principally Germany, is needed to prevent disaster befalling its weaker ones, including Portgual and Italy and Spain. At the same time, central banks need to pump more liquidity into the financial system, in the US, Japan, in the UK and in Europe.
I do not believe there will be a disastrous outcome in the Eurozone and that, in the final analysis, the instinct for collective self-preservation will prevail. Once the next serious round of money printing gets underway across the world, I am expecting another big rally in global equities. Until this is confirmed, my trading stance on stocks is fairly cautious.
S&P 500
At the start of June, the Dow Theory gave a sell-signal. This venerable branch of technical analysis – which compares the behaviour of the Dow Industrial and Dow Transport Averages – has helped predict many market declines and recessions over the last 110 years. The average loss in the S&P 500 following a Dow-theory sell-signal is 14.8% over six months.
While US stocks have bounced back since this signal, big risks remain. Given the S&P’s dear valuation, I believe that a sustained resumption of its bull market since 2009 will require more printed money from the Federal Reserve and progress towards a resolution of the European crisis. Still, with the index currently above its 55-day exponential moving average, I am not seeking short positions for now, despite my view that the S&P could retest 1268 this summer.
FTSE 100
The FTSE offers much better value right now than the likes of the US equity indices. According to one of the most successful valuation models of all – ShareMaestro – the UK large-cap index is currently worth around 8700, compared to its actual present value of 5600. The necessary catalyst for the FTSE in order to get some way towards that level is, I believe, a major bout of monetary easing from the big central banks.
The Bank of England is already poised to inject further liquidity into the flagging UK economy, but it is America’s Federal Reserve and the European Central Bank that matter more here. With the index currently just above its 200-day simple moving average, I have a slight bullish bias. So long as the market meets this criterion, I would buy bounces off the 13-day exponential moving average currently positioned around 5430.
IBEX 35
I do not see Spain leaving the Eurozone, nor any other country for that matter, apart from Greece. Ultimately, it is going to be less costly for Germany and for other nations if the world’s twelfth largest economy remains within the single-currency area. Spanish stocks – which include international household name brands like Zara-owner Inditex, Telefonica and Repsol IPF – already offer potential opportunities to longer-term value investors. The dividend yield on the IBEX 35 recently touched 8.4%, its second highest level in 25 years.
One issue with investing directly in Spanish stocks is currency-risk. I firmly believe that in order to survive, the Euro will likely have to cheapen versus many currencies, including sterling. However, spread bets are quoted in sterling and so do not suffer from this disadvantage.
While the IBEX has bounce from its early June lows at 5988, it has yet to surmount its 21-week EMA. Were that to happen, I would be much more willing to believe that we were in the embryonic stages of a new bull market. In the meantime, I’d be looking to short drops through the 21-day EMA. A revisit of the lows is not out of the question.
Nikkei 225
Japan’s stock market is a world leader when it comes to producing disappointments. Equities in the land of the rising sun have had countless false dawns during their long bear market since 1990. It would take a brave man to declare the Nikkei’s slump as having ended at the early-June lows of 8239. Still, it is possible that the Nikkei could surge back towards the 10000 level once the next round of global money-printing starts up.
I would be much more inclined to take long positions in the Nikkei as and when it got back above its 21-week exponential moving average, currently at 9001. Until that time, I would use the daily chart and go short each time it dropped below its 21-day EMA.
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