Ibex 35 Plunges 4.69% Back to 8,000 Amid Italian Banking Fears

Ibex 35 Returns to 8,000 as Italian Banks Teeter

The Ibex 35 finished at 8,066.50 points, shedding 4.69% in a single September 2011 session. Seven rating downgrades by S&P on Italian entities acted as the trigger, but the slump wasn't a one-day event: Welcome back to the seven thousands summarized the sentiment after hitting a weekly low of 7,639 the previous week. The question looming over the entire quarter was simple and brutal: could the Ibex hold 7,700 or would it break like Greece?

On that same day, Sacyr plummeted 7.62%, Arcelor 7.47%, and Mediaset 6.22%. The two major banks, Santander and BBVA, fell 5.94% and 5.79% respectively. The Portuguese PSI (-5.46%) and the German DAX (-5.09%) trinc suit in what several participants bluntly described as a doomsday scenario. Only silver, with drops exceeding 4%, performed worse than equities.

Dividend Split: The Only Bullish Argument Left

With prices in freefall, the dominant narrative shifted to dividends. The data circulating was striking: 21 Ibex companies traded with dividend yields above 5%, and the index as a whole was close to 6%, its best historical figure outside of 2008. The aggregate P/E ratio, around 7, was the lowest since 1996. Stocks like BME offered, on paper, the prospect of recouping the investment in less than a decade solely through payouts.

The skeptical view soon emerged. Some argued that the only remaining attraction for a falling stock is its dividend, and that companies would do everything possible to avoid cuts, starting with Santander. Others countered that a P/E of 7 is hardly a bargain when estimated earnings are revised downwards monthly. The argument, then as now, remains unresolved.

Italian and American Banks: The Downgrade Drip

The external environment offered no relief. S&P downgraded seven Italian financial institutions. It was known that CAM's exposure to real estate was around 17.5 billion with a default rate of 40%. Moody's, meanwhile, cut the ratings of Bank of America, Wells Fargo, and Citigroup, and the bill for the debt crisis to European banks was estimated at 300 billion. Any one of these headlines, individually, would have justified a panic session.

The Greek situation permeated all analyses. A participant with direct experience in the country argued that the debt was unpayable, that deep austerity would lead to unpredictable revolts, and that the alternative, pogre refinancing, would take years. No one dared to set a date.

Volume Disappears: "Like a Granny's Living Room"

One of the most recurring phenomena of the quarter was the draining of liquidity. With the short-selling ban in effect, the Ibex's future moved with low volumes and erratic swings. Days saw the largest order in the session consist of barely 101 or 102 contracts. The description that best captured it was blunt: since they banned shorting, this looks like a granny's living room in terms of volume.

The exception occurred during the options expiry week. Packages of 515 contracts, over 7,150, and even 3,400 appeared in a single go, with a positive daily balance. Several analysts interpreted the maneuver as a coordinated attempt to push prices up just before the key hours, taking advantage of the staggered expirations of EuroStoxx, DAX, Mini S&P, CAC-40, and Ibex. Someone summarized it plainly: it was about diverting attention with a timely rumor.

Three Hammers and a 7,700 Support

The Ibex registered three lows that technical analysts couldn't stop talking about. On August 11th, it hit 7,770, and by September 1st, it was at 8,800. On September 13th, it marked 7,506, and three sessions later, it was back at 8,444. The Friday before the quarter's close, the low was 7,639. The first two rebounds had each gained around 1,000 points. The third, they said, remained to be seen.

The star level was the mystical 7,700, a support some placed at the base of a long-term channel projected towards 4,200 in an unknown scenario. The reasonable doubt was whether the Spanish index could decouple from the rest of Europe while the DAX and S&P hit panic lows. The majority conclusion was that gravity will be gravity.

Euro, Gold, and Silver: The Dollar is the Safe Haven

Currencies told a parallel story. The euro lost the 1.4 level, and the eurodollar clearly turned bearish. Spot gold traded around 1,630.85 dollars per ounce, but silver took the brunt with drops exceeding 4% and sharper intraday plunges. One participant complained about having believed they would get rich with grandma's silver candlesticks, and that at this rate, they would be worth less than IKEA's.

The underlying thesis was that when the credit system seizes up, the currency supporting it tends to strengthen, and that currency was the dollar. Some suggested hedging euro short positions with longs in other pairs. No one claimed to have the final word.

Expirations and the Michigan Rumor

During options expiry week, a rumor about the University of Michigan's consumer sentiment index served to liven up the preceding session. The strategy involved creating anticipation, pushing prices up until expiry time, and leaving unwary buyers exposed when the data was released. Some warned that the actual direction could be the opposite, while others simply decided to exit with a 1.5% profit before Monday.

The quarter's balance leaves no room for doubt. The Ibex started at 8,463 points, hit a low of 7,506, and closed the sample around 8,100. The gap between technical optimism and macroeconomic panic remained open until the last message, with the October contract already rolling and volume once again at rock bottom.

---

With official rates at their limit and the printing presses running hot—as one veteran ironically put it—the Ibex faces October having resolved nothing essential. If the support holds, there will be a rebound. If not, the next technical stop points considerably lower, and no one wants to put a figure on it.