Idea of the Day: Is it time to look twice at the Ibex?

The Spanish index may have taken a knock today after the Catalan government failed to revoke its pledge for independence and Madrid’s response to suspend Catalonia’s autonomy, however this is an index that is going places, and we think that traders should take note of a few things.

What: The Spanish index may have taken a knock today after the Catalan government failed to revoke its pledge for independence and Madrid’s response to suspend Catalonia’s autonomy, however this is an index that is going places, and we think that traders should take note of a few things including:

1, At this stage of the global stock market rally investors are looking for value. After peaking in May and suffering a sharp decline post the referendum result a few weeks back, the Ibex is looking good on a price/ earnings basis, and its P/E ratio is 15.64 vs. 18.44 for the Eurostoxx 50 index and 22 for the S&P 500. If value continues to be a key driver for the market then we could see the Ibex rally.

2, Traders have been lamenting the lack of volatility in financial markets this year, however there are pockets of volatility that could attract traders. 10-day volatility in the Ibex is currently 12.00, vs. 4.7 for the Eurostoxx index and 3.9 for the Cac 40. There are two ways of looking at the Ibex’s elevated levels of volatility: firstly, if volatility has peaked then the Ibex may be about to recover, second: if volatility remains elevated then we may continue to see large declines in the index in the coming weeks. Each scenario is a good opportunity for traders.

3, Technical indicators look good, for now: The Ibex has managed to hold above the 38.2% retracement of the Dec low to May high (see chart), which is a key Fibonacci support level at 10180. If this index can remain above this level into the end of this week then we could see a recovery rally at the start of next week.

How: The Ibex is currently below its 200-day sma at 10292, which is an uncomfortable place to be, especially if you want to go long. Thus, we would not look to enter this index unless we see a successful break and daily close above 10295-10300 in the coming days. As mentioned above, 10180 – the 38.2% Fib level - is a critical level of support. If we clear this level and fall below 10165 then we believe this could trigger a deeper decline back towards 9865 – the 50% retracement of the Dec to May uptrend.

While it is a fool’s game to try and predict how the Catalan fight for independence will play out, when it comes to the Ibex, we believe that you should follow the price of the index and not marry yourself to one position. While the Ibex is not the most stable index right now, it does offer some much-needed volatility in a world where other indices are moving at a snail’s pace.

Chart 1: 

Source: City Index and Bloomberg 

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