Ibex Stuck Below 11,000 as Dow Hits 2008 Highs

Ibex stuck at 11,000, Dow at 2008 highs

How is it that the Dow Jones hits highs not seen since June 2008 while the Ibex 35 still can't break above 11,000 points? April 2011 begins with that contradiction front and center. The seasonal pattern at the start of the month invited optimism, Portugal had just been bailed out, the European Central Bank and the Bank of England had meetings, and the US was publishing its unemployment figure. The Dow was aiming, according to forum users, for 12,800. The Ibex, meanwhile, just watched. A summary circulated around trading desks: Americans rising, Spanish index stuck, nothing new under the sun.

The April seasonal pattern and US pension plans

The first hypothesis of the month was purely seasonal. In the first days of April, a pattern repeats that is attributed to contributions to US pension plans: if money flows strongly into American indices, the Ibex eventually catches the fever. The argument spread enthusiastically —videos, radio shows, charts with figures from recent years— and suggested that the Spanish index would trinc the script to the letter. It did trinc it. The problem is that a pattern doesn't distinguish between a 300-point rise and a simple swing. And what came next was a fall that nobody expected.

Why is Santander talking about cutting 300 billion in outstanding credit?

Because the bank said it out loud and the market carried on as if nothing had peine. Reducing the outstanding credit balance in Spain by 300 billion euros over three years is the kind of headline that should move indices, economic activity, and employment forecasts. It was heard as rain. Meanwhile, Portugal was bailed out and a forum user placed Spain at the front of the line for an IMF intervention, with a bond auction mid-morning and the ECB meeting in the afternoon. The calendar that week read like an exam: German industrial production, decisions from the Bank of England and Frankfurt, and the US unemployment figure. Shorts were placed at 10,865 and 10,787 points. The 11,000 level, meanwhile, remained a wall. And underneath, the political clock: after the May 22 elections, cuts in local and regional administration would begin, with unemployment figures bound to rise.

Ibex can't break 11,000: ingredients of a market top

Technical readings agreed on the diagnosis but split on the conclusion. The index approached 11,000 without breaking it, with the Spanish banking sector sitting right at resistance, and bullish sentiment growing day by day. That cocktail —near highs, growing euphoria, friendly headlines— is the classic recipe for a top. Since the 6th, the hourly RSI had been warning of likely exhaustion, and in the European banking index, a close below 705 triggered the alarm signal. The bearish scenario pointed to the 10,220-40 zone, which had previously acted as support and resistance, and left 10,580 as the first obstacle to watch in a possible rebound. In banking, the advice was explicit: no buying and holding. Each stock with its stop and target; in a mid-sized bank, 5.52 euros was set after breaking 5.10. None of this prevents the market from rising another 3% before turning, and that's the problem: with tight stops, the margin for error is minimal.

VIX at 2007 lows and declining volume: the signals that don't add up

There are indicators that are scarier than an index at highs. The VIX was at levels not seen since early to mid-2007: the options market was pricing in a calm that didn't match the background noise. And volume had been falling since January. Less participation, less conviction, more dependence on someone with big money holding up the price. In that context, any day of collective hysteria can wipe out half a portfolio, and leveraged inverse products are for intraday and little more: holding them for weeks is a very expensive way to be right about the wrong direction.

How much QE2 is left and how long will cheap money last?

The Federal Reserve's purchase program totals 600 billion, and by that point about 510 billion had already been spent. Every afternoon the operation schedule was published and every afternoon the market adjusted its hope: either the 600 billion would continue to burn at a good pace until early May, or the drip would be stretched to late June spending less per batch. The difference is not cosmetic. If cheap money runs out sooner, the American party has an expiration date; if it's stretched, the end is delayed and the Ibex gains time to attempt an assault on 11,000. Some argue that the last leg up is borrowed and that the market has been discounting exactly that for months. Against that weighs the obvious: as long as the tap stays open, nobody wants to be the first to go short. Wait and see.

The macro data the market decided to ignore

Unemployment, CPI, and retail sales in Spain. All three bad, published almost back-to-back, and the reaction was to go back to green as if the data came from another country. Brent reversed after the figures were known and the Spanish bond relaxed after being punished for weeks. For part of the market, there was no analysis there: there was computer-assisted mockery financed by the central bank. For another, it was simply the purchase program doing its job. As another forum user argued, stock indices are, at bottom, virtual money sustained by a few who can create it out of nothing, and the easiest of all to manipulate is precisely the Ibex 35: cheap, narrow, and with few stocks with real weight.

Brokers, algorithms, and real-time data: what's cooking underneath

While some looked at charts, others looked at code. These months saw a multiplication of ads for new houses to trade stocks, forex, and CFDs, some without clear supervision and others displaying FSA registration —Plus500, Anyoption, and a list that grows every week—. The question is legitimate: if there are so many intermediaries, are there that many profitable clients? At the same time, more technical traders were programming their own tools, processing real-time quotes and Java charting libraries with specific functions for Japanese candlesticks. The discussion drifted toward how to control a script running unattended, how to stop it without killing the process manually —a marker file that the loop checks, for example— and how to distribute the load when a module takes ten seconds per execution and drags the entire decision flow. Details that don't make the newspapers and that decide whether an order goes out on time or late.

In the end, April 2011 is summed up by the market itself: the Ibex gained 300 points in four days, the Dow continued to hit highs, and Spanish credit still had 300 billion euros too much. Everything fits if one accepts that the stock market long ago stopped having anything to do with the real economy. If you don't accept it, there's always technical analysis, the deck of cards, and the crystal ball.