Ibex 35: June 2014 highs unsupported by the real economy

Ibex 35 in June 2014: Highs amid a struggling economy

How can a stock market index reach annual highs while the economy it supposedly reflects fails to gain traction? June 2014 presented this contradiction: the Ibex 35 hovered between 10,700-11,000 points, nearing medium-term peaks, fueled by abundant cheap money from the European Central Bank. The real economy lagged behind. And the red numbers that many predicted – losses, not political ones – failed to materialize for another month.

Draghi, cheap money, and the gap between stocks and the economy

The invisible protagonist of that month was Mario Draghi. The ECB was preparing its arsenal – interest rates were set to fall – and banks celebrated with rallies while others watched cautiously. The theory was simple: easy money, rising assets. The practice, uncomfortable. One of the prevailing ideas was divergence: never had the financial economy been so distorted from the real one, with a contracting economy and an index hitting records.

The diagnosis was repeated constantly: the US stock market at highs while the economy contracted, downward-sloping yield curves, and a handful of heavyweights —Santander, Repsol, and Iberdrola— artificially propping up the Ibex. The term "death cross" was even applied to global indices, a signal that the worst is yet to come, which, punctually, almost never proves accurate. The question lingered: can this end well?

Repsol, Pemex, and the CNMV: the stock that heated up the month

If one stock dominated conversations, it was Repsol. The CNMV suspended its shares from trading while Pemex divested its stake. For some, it was institutional selling anticipating a placement and a trap for the unwary; for others, a discount that would be closed in the same session, as had peine with other companies. The repeated question: at what price to enter?

The dilemma had a psychological component not found on balance sheets. Those holding Enagás wondered whether to switch; those out wondered if the dip was a floor or a step down. The recovery after institutional sales "is usually rapid," it was said, but also that too easy seems too good to be true. The script repeated itself for another month: the retail investor asking for an entry price for a stock that had just been suspended.

Is a correction coming for the Ibex 35? Technical projections of the month

The month had its own analyst pulse. One technical projection placed the key support above 10,740 points, with an upside target in the 10,860-10,950 range and a warning that indicators were starting to look "very ugly." Only a pullback to 10,600 with a strong recovery would push the index above 11,000, according to another reading, extending to 11,390 if momentum held. On the other end, the more orthodox analysts watched futures levels: closing above 1,962 to attack 1,975, with supports at 1,948 and 1,934. Breaking those two, they said, with volume, would open the door to a larger correction towards 1,898-1,850. And in the background, the warning that when the moment came, "it will be a stampede and we'll flee through a very narrow door." No one knew when. Everyone antiestéticared the stampede.

Vocento and small caps: searching for x10 in the mud

Where some saw a graveyard, others sought gold. Vocento was the perfect example of a "mega-penny stock": capitalized at around 270 million euros and trading a hefty 30,000 euros daily, with a 90% drop from historical highs that hurt just to look at. The thesis was as old as the market: if something plummets, it rebounds sooner or later. And sometimes it multiplies by ten.

Another repeated name: Hispania, the real estate company that launched "without bricks on the balance sheet, no debt, no physical properties," something many considered essential after years of buried losses in the accounts. The problem, as always, was the timeline. How many years do you have to wait for a stock at 5 euros to reach 40? The honest answer, they suspected, was that nobody knows.

The gazelle indicator: when five friends ask you for stock tips in three days

There are thermometers not found in any report. One of the most reliable is the people around you. One participant recounted that in three days, five acquaintances had asked him for stock tips to invest "practically all their savings." A horde of gazelles is coming, he warned, more than in the Masai. When your brother-in-law asks how to buy stocks, the market isn't cheap; it's partying.

In parallel, the feeling that making money was "easy" worried veterans: every small dip was bought, and everyone got rich. The recurring comparison was cheap money as a social drug: you know it's bad, that there's a hangover tomorrow, but at four in the morning, everything seems like a good idea. The problem isn't the hangover. It's the day after.

Corona, World Cup, and Iraq: what didn't move the market

Meanwhile, current events were buzzing, and "the markets" remained unfazed. The abdication of Juan Carlos I and the proclamation of Felipe VI occupied headlines and some analyses on institutional fragility, with doubts about what would happen "the day a republic is desired." The war in Iraq, a possible Russian gas embargo, or an Argentine default —"checkmate to Argentine debt," they said— should have sent indices plummeting. They didn't.

The index behaved "like the Spanish midfield playing tiki-taka": controlling, without surprises. Even the Brazil World Cup coincided with the market, with football acting as a great collective anesthetic. The suspicion lingered that optimism was financed with borrowed money and that the party would end when Draghi turned off the soda tap.

Enagás and the Peru contract: a dose of positive reality

There was, however, news that boosted stock prices on their own merits. Enagás, along with Odebrecht, was awarded a gas pipeline in Peru for 4 billion euros, a mega-contract that revived the argument for international infrastructure as a safe haven asset. The stock gained traction with such projects while the rest of the index depended on the ECB's mood and institutional sales.

The month-end close found the Ibex near 11,000 points, with the 30% correction some had predicted still looming and small caps swinging between hope and panic. Those expecting a crash had to wait. Again.

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With cheap money flowing, the divergence between stocks and the economy persisted, and gazelles kept entering, the correction seemed imminent every Monday. That Monday never arrived. Until it did, of course, though by then, no one called it that anymore.