Ibex 35 January 2014: Banking Surges as Technical Analysis Targets 9,950

The Ibex 35 in January 2014: Banking Surges and a Target at 9,950

Santander's non-performing loans in Spain closed 2013 at 7.49%, nearly a point higher than the 6.4% in September. The Ibex 35 still rose. All the contradiction of January 2014 is captured in these two figures: an index celebrating liquidity while balance sheets continued to show deficits. The year began with banking stocks surging in pre-market trading, continued with the selective index above 10,050 points, and ended with Telefónica falling 4% in a single session and technical forecasts pointing to 9,950.

Bankia at €1.24: One Million Shares in 20 Seconds

The first day of the year served to gauge appetite. In pre-market trading, orders for Spanish banking stocks surged to almost unbelievable levels, with Bankia acting as the thermometer. One million shares at €1.24 traded in twenty seconds. The volume wasn't from a retail investor on their mobile: large players entered, with JPM selling 4.5 million shares and some houses buying in blocks.

Popular, Bankinter, and Santander itself trinc the movement. The reasoning repeated was less sophisticated and more mechanical: if cheap money keeps flowing and Spanish bonds tighten, someone has to buy banks. The index surpassed 10,050 points and, at the start of 2014, this was met with sarcasm: the apocalypse live, some said, having heard for years that the Spanish stock market was dead.

Why is the Spanish Stock Market Rising Amidst Economic Crisis?

The question echoed throughout the month. The most common answer pointed to liquidity: the UK, US, Japan, and China were buying assets at a stratospheric pace, with central banks flooding markets with bonds and stocks. The underlying argument was uncomfortable: if the risk premium falls to 3.7%, a 27% annual rise in the Ibex seems modest.

The most optimistic calculation assumed the party would continue as long as the Federal Reserve didn't intervene. The pessimistic view started elsewhere: tapering, the gradual withdrawal of stimulus, would make bonds more expensive, and with them, American mortgages and loans. Debates arose whether the money being withdrawn by the US would be replaced by capital fleeing emerging markets. No one had a definitive answer.

The Head and Shoulders Pattern Setting the Floor at 9,950 Points

Mid-month brought a correction. Telefónica lost 4% in one session, and BBVA lost 5%, figures not seen every month for stocks of their weight. Technical analysis came to the rescue of frayed nerves: a head and shoulders pattern emerged with a high at 10,550, a neckline at 10,250, and a target at 9,950.

The interpretation was orderly and even reassuring: the punishment mathematically ended at that lower level, trinc by a rebound. Others warned that, after such a plunge, a technical rebound was reasonable, with Japan's flag waving high. The index rebounded, and the floor held for several sessions. Predictions of 12,000 and even 14,000 points circulated again without anyone demanding too many explanations.

Santander Profits €4.37 Billion, Non-Performing Loans Rise to 7.49%

The year's results arrived at the end of the month. Banco Santander reported a 2013 profit of €4.37 billion, a 90% increase from 2012. Markets interpreted this as a mixed good news: better than expected, but not enough to justify euphoria.

The geographical breakdown explains why. Latin America contributes 47% of the group's profit (Brazil 23%, Mexico 10%, and Chile 6%), Europe 43% (UK 17%, Spain barely 7%), and the United States 10%. Spain, the engine of the crisis, has become a minor part of the business. And there lies the uncomfortable data: non-performing loans in Spain rose to 7.49% from 6.4% in September.

Emerging Markets, China, and the Sale of Motorola to Lenovo

On January 29th, Google announced the sale of Motorola to Lenovo, and the US tech sector surged in after-hours trading. The deal allowed the month to close with a recurring thesis: capital was fleeing emerging countries for the United States, and this flight would strengthen the dollar.

Underlying this, a default in China's shadow banking sector shook Asian stock markets and dragged others down. The most cynical reading was also the most repeated: those who can wage war externally have the printing press, and those with aircraft carriers can afford to print. With Japan at exactly 15,000 points and a 2.4% drop in a single session, the global scenario became less comfortable.

Small Caps, Stops, and Unrealized Gains: The Warning

The warning arrived before the hangover. In such a market, it was said, small cuts were bought aggressively, positions without stops were abundant, and small-cap stocks fell 5% at a time with gaps preventing exit at reasonable prices. The author of the warning confessed to losing 60% in one stock, 80% in another, and 70% in a third. All with positions of €5,000 or €6,000.

Others recalled that periods of euphoria fuel greed and arrogance, and that paper has two sides. After January's green face would come another. Tears will be of blood and pyramiding will be the gallows, summarized one of the veterans, with seventeen years of market experience. The month ended with the S&P 500 deflating at the close, futures in the red, and doubts about whether the rebound would hold in February.

With non-performing loans at 7.49% and the index at annual highs, logic dictates the next move should be downwards. This has been said throughout 2014. It would be prudent not to bet too heavily on this time being correct.