This longer piece is about the steps in the journey taken by Greece since the troubles in Europe began and illustrates our overall approach to markets. The first chart is made from monthly data and shows the whole decline from the 2007 highs to the bottom extensions that marked the lows, in January and again in June – a huge drop. We can’t use monthly-scale signals to ‘time’ entries and exits as they are too imprecise but they do provide good context. A monthly-scale bottom means that the normal emotional swings in any market have been replaced by utter despair – this was also apparent from reading the press coverage of Greece.
That first group of monthlies did lead to a ‘buy’ recommendation sent on the 4th January 2012. Any bottom extension means that those sellers that can sell (at that time frame) have done so and that the market is therefore ‘sold out’. The normal consequence is an end to that drop and probably a bounce of some kind so these signals are worth buying. In this case we also had another view of the situation that comes from our analysis of the feedback structure created by the Eurozone – the poor would get poorer indefinitely as their competitive position worsened. This situation will tend to push equity values downward in the affected countries until there is no hope left – as had happened by this stage in Greece.
A Greek devaluation seemed possible, as it still does, which would go some way toward restoring the country’s competitive position. This meant the prospect of a big rally in asset prices that would probably be greater than any devaluation and a big turn was due. The market crawled a bit lower, making its actual low point a week later. A 40%+ rally ensued in the next 4 weeks.
We advised selling Greek long positions on the 10th February as part of a general ‘sell Europe’ advice note on another big turn day. Spain has been no higher since that day and the advice was particularly easy to give for Greece as it coincided with the announcement of a widely-expected austerity package there. Buy the rumour, sell the news…
A new decline began, taking the market down 45% to slight new lows as more gloom gathered amid failed elections and riots and a fresh monthly bottom extension duly appeared. This time around there were also weekly-scale extensions and finally on the 16th May, a daily version too. We advised buying the next day. The market continued to fall sporadically until its all-time low point three weeks later and then a 99% rally began. Having advised getting in early, we also advised getting out on the first convincing signal which was a daily-scale top extension. We advised selling on the 13th September for a 63% profit – several weeks too early.
Next there was a weekly-scale top extension late in October (2nd chart, labelled in the 3rd chart) that made us want to add Greece to the ‘sell short’ list of candidates again, alongside Italy and Spain. We did not initially do this as other European markets were moving higher from compressions. We have now done so, as of November 5th after those other markets made bearish signals and a rally took Greek prices back up near to that new top extension area.
There is a growing expectation within Europe that the ‘Euro crisis’ will end with some kind of solution – probably from the overt or covert mutualisation of debts and possibly with some kind of central budgeting process too. Some have even pointed approvingly at the smaller European debt burden than the one in the US. This, as philosophers say, is a ‘category error’ as the US is not only a terrible benchmark to use but the debt is not actually the main problem – it is that the economies of Europe have had all their easy adjustments (devaluation, targeted stimulus by national central banks) removed by currency union and lack alternative methods that they can sell to their pampered electorates. As the senior Luxembourg politician has remarked: “We all know what we need to do, but we don’t know how to get re-elected if we do it.” So long as this remains the case, we will continue to recommend that you sell the uncompetitive countries’ equity markets when any reason to sell anything in Europe emerges from our normal analysis and keep buying Germany and its flexible neighbours whenever it is time to buy. There will be times to buy Spain, Italy, Greece and France for short-term rallies (even then, Germany will usually be the better prospect) but we don’t expect to see long-term reasons to buy equities in these weaker economies until they also experience despair and we see long-term bottom signals. We will advise.