Saturday, 10 August 2013

Ibex ready to rally to 11,500?

Lets be clear - Spain's economy isn't ideal. With Unemployment sitting at 26.3% and showing now structurally promising signs for a reversal. Retail sales still sit at -4.95% y/y and starting to turn lower, but one message we have seen from nearly all equity markets over the last few years is that they really don't care about the fundamentals, and therefore from a technical perspective we could be set for an impressive rally.

But below we can see a rather important level in the IBEX which will prove pivotal over the next 6-9 months

IBEX, daily. Thomson Reuters
What we see is a typical bottoming formation, an inverted H&S, but as we stand there is the neckline standing were we closed on Friday, furthermore there is a strong downward trendline sitting a few points above market. So here is the Technical set-up.

Next we can see the IBEX vs. the Spanish 10 year benchmark and for obvious reasons they would correlate highly - but what we've seen is the two diverge with Spanish debt relatively outperform Equity and so we have an opportunity here to hedge our potential long IBEX trade which would be short ES 10 futures / cash.

With the 10's standing at 4.48% we could potentially see this underperform Equity in the coming months as we see the two lines converge.

So our set-up is as follows, buy the IBEX on a daily close above 8,800 and simultaneously short Spanish 10 year debt. As we are not quite at this stage we have to follow but it may be reasonably close.

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