#$eirl

A composite of the so-called “PIIGS” markets in Europe is testing 7-year highs.

The PIIGS have been the topic of our Charts Of The Day and blog posts periodically over the past few years. Of course, “PIIGS” is the not-so-affectionate acronym for “Portugal, Italy, Ireland, Greece and Spain” -- the countries at the root of the Eurozone economic and debt struggles in recent years. Typically, the occasion of one of our PIIGS posts is to point out potential problems based on the behavior of the countries’ stock markets. Today, it is a different story as we are actually highlighting a potentially positive development among the PIIGS. Of course, as with most inflection points, a potential positive is often also a potential negative as well should prices inflect in the opposite direction.

So what is this potentially positive action in the PIIGS? Years ago, we constructed a “PIIGS Composite” by combining the main stock indices of the 5 countries in a equally-weighted manner. Unlike much of the world in which equity markets have, for the most part, rebounded substantially since the financial crisis, the PIIGS have continued to flounder for the past 8 years since the 2009 low. And, in fact, as measured by our Composite, the PIIGS actually went to substantial new lows during the teeth of the Eurozone crisis in 2012.

At the moment, things are looking brighter, however, as we mentioned. Specifically, we see the PIIGS Composite presently testing 7-year highs, marked by peaks in 2011, 2014 and 2015.

So what will the PIIGS do next? Will they be rejected here at the former peaks -- or will momentum propel the PIIGS to new multi-year highs? We will cover our thoughts on this topic in a Premium Post at The Lyons Share, including what this current action means for European equities in general. And we will break down the 5 individual PIIGS markets in order, from least to most attractive. If you’ve been considering subscribing to The Lyons Share, now is the perfect time to join as our Spring Sale is offering members BIG savings.

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After a several year reprieve, the stock markets of Europe’s “PIIGS” countries are breaking down again.

Precisely 4 years ago, in the summer of 2012, the financial world was fixated on the European continent. At the time, risks posed by the economically-challenged countries affectionately known as the “PIIGS” (i.e., Portugal, Ireland, Italy, Greece and Spain) threatened to bring the Eurozone’s financial system to its knees. And just as the continent appeared to be on the brink, ECB president Mario Draghi delivered his infamous “whatever it takes” speech, pledging the bank’s resources in fighting the financial crisis. That moment turned the tide for European equities as they would stave off collapse and stage a furious rally (more realistically, the markets were simply ready to rally as Mr.Draghi had certainly uttered plenty of supportive remarks previously).

As it happens, the PIIGS markets would enjoy the strongest rallies, not surprisingly, as they were the most beaten down. What may be surprising is the fact that the rally would last 3 years, an inconceivable notion at the time. However, that’s the nature of markets. They will more often than not surprise most people as the positioning of “most people” often dictates that the path of least resistance is to move away from that crowd.

Last summer, however, it became clear that the honeymoon was over. The Portuguese and Greek stock markets had topped in 2014 and Italy and Spain would peak in the spring-summer of 2015. By far the most resilient of the 5 was Ireland, which saw its stock market hang tough until the start of 2016. Collectively, the group would put in essentially a double-top in the summers of 2014 and 2015. At least they did based on a composite of the PIIGS markets that we constructed several years ago in order track the group’s behavior.

Currently, this PIIGS Composite has folks experiencing flashbacks of the events of 4 years ago. That’s because the index has just fallen back down to levels last seen near the end of 2012. Furthermore, on a relative basis versus the more stable Dow Jones Europe STOXX 50 Index, it has also suffered an unambiguous breakdown recently. 

Interestingly enough, the 61.8% Fibonacci Retracement of the 2012-2015 rally sits precisely at the level of the post-2012 lows in April and June 2013 and February of this year. This is only one example, but considering this PIIGS Composite is an untraded creation of ours, it does suggest that patterns such as Fibonacci are naturally occurring forces in markets, rather than merely self-fulfilling phenomenons.

So what are the ramifications of these developments? Rather than reinvent the wheel, we will close by repeating what we said in a post during similar circumstances last February.

The PIIGS Composite weakness is not just significant on an absolute basis. As the chart shows, it is also breaking down on a relative basis versus the DJ Euro STOXX 50, a proxy for the more established, “blue chip” stocks in Europe. Like all higher-beta sectors, stock market bulls want to see the PIIGS outperforming the lower-beta blue chips. That can be an indication of a willingness of investors to take on risk, a healthy condition for a bull market. In other words, when the PIIGS are outperforming, it is symptomatic of a “risk-on” environment. Conversely, when they are lagging, it is a sign of “risk-off”.

As the chart indicates, risk-off is decidedly the case at present as the PIIGS:STOXX 50 Ratio just broke sharply lower, through a shallow multi-year uptrend. Looking at prior trend breaks in the ratio, e.g., mid-2008, late-2009, and mid-2014, we see that substantial bouts of weakness ensued throughout European markets, particularly in the PIIGS. These also led to scares among some or all of the PIIGS pertaining to their economic viability.

This is not a pretty situation shaping up for the Eurozone once again. Whatever benefit that accrued as a result of “whatever it takes” may have largely run its course. Again, it will not be a straight line lower. However, the absolute and relative breakdowns in the PIIGS Composite suggests that the post-2012 run-up is over. Thus, while the PIIGS rally of the past several years may have tasted like Jamon Iberico and Prosciutto di Parma to investors, they may have to settle for scrapple and spam from any rallies in the near future.

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Ireland’s stock market is one of the first to hit new highs following the recent correction.

No, this is not a comment on the college football rankings. It is still a markets-focused blog. This post is a shout-out to the country of Ireland -- or at least its stock market. We mentioned in yesterday’s post on the broad European equity market that most markets across the continent looked similar, i.e., approaching resistance as they struggle to claw back following the August-September rout. Ireland is an exception, however, as evidenced by its ISEQ Stock Exchange Overall Index closing at a 7-year high today.

Now, assuming you have access to these Irish stocks and the potential to participate in the rally, there is perhaps one little caveat before getting too gung-ho bullish. One of the most important levels of resistance (or support) in our experience, is the 61.8% Fibonacci Retracement from a major high to a major low (or low to high).

In the case of the ISEQ, the index hit its all-time high in 2007 near 10,000. In the subsequent 2 years, the index sold off by more than 80%, bottoming below 2000 in 2009. The 61.8% Fibonacci Retracement of that decline is around 6900. The ISEQ closed today at 6714. Thus, while the new high is a positive -- especially with most other averages well below their highs -- the immediate upside may be somewhat limited (you may recall, in a St. Patrick’s Day post earlier this year, we targeted this area around 7000 as a level of potential resistance),

As you can see on the longer-term chart, the next most important Fibonacci Retracement level, 38.2%, was successful at halting the ISEQ’s post-2009 rally for about 10 months in 2014. We would expect the same may occur near the vicinity of the 61.8% level around 6900.

Lastly, as we mentioned, the Irish stock market bears little resemblance, in the short-term, to most of the markets in Europe. Likewise, it bears little resemblance to its fellow, so-called, “PIIGS” in the longer-term. Countries like Greece and Portugal are much closer to 7-year lows than highs at this point. So what accounts for Ireland’s separation from its fellow PIIGS? As we stated in the St. Patrick’s Day post:

Many economists will point to the country’s aggressive austerity-driven approach to its economic reforms. While we are not economists, and don’t strive to be, we personally are sympathetic to such arguments and applaud such a commitment by the country. And though the nature of Ireland’s economic woes was somewhat different than the other PIIGS, their approach to reform should at least garner some consideration among other debt-burdened, economically-challenged countries.

Whatever the cause for Ireland’s out-performance, economically or stock market-wise, the country deserves a tip of the cap...or the pint, if so inclined.

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While they may forever be inexorably linked together, not all PIIGS are the same. By PIIGS (i.e., Portugal, Ireland, Italy, Greece and Spain), we are of course referring to the debt-laden European countries whose economic woes have threatened the stability of the union. These countries have been the source of crisis on several occasions over the past half dozen years or so, in particular in 2012 and presently in the case of Greece. However, not all of the PIIGS have continued to struggle. One of the PIIGS in particular has risen (flown?) above the rest in recent years: Ireland. And what better time to point out the country’s superior performance than St. Patrick’s Day.

As the chart illustrates, since the lows in 2009, Ireland’s ISEQ stock index is up over two-fold. In fact, through February, the ISEQ Index is up 211.9% versus a gain of 211.1% for the S&P 500. And in comparison to its fellow PIIGS, Ireland’s stock market performance has been even more impressive. The next best performers, Italy and Spain are up 76% and 59%, respectively. Then there is Portugal which is 20% below its 2009 low and Greece whose stock market is half of what it was at its 2009 low.

Here are the PIIGS’ returns since the 2009 low, since the key 2012 low during the height of the PIIGS crisis and since June of last year when many of the PIIGS hit peaks of varying importance.

One can see that from the major PIIGS low in 2012, Ireland is handily beating the other countries. Italy and Spain are still well above those lows, as is Greece even. Ireland, however, has doubled Greece’s performance -- and doubled its own price since its 2012 low. Portugal meanwhile has given back practically its entire post-2012 rally. Not good.

The top in June of 2014 presented challenges of different degrees for the PIIGS. Portugal and Greece are well off of those respective tops and indeed their weakness over that period accounts for much of their loss since 2009. Conversely, Ireland has since been able to surpass its highs from 2014 by over 20%. This accounts for much of Ireland’s margin of post-2012 outperformance over Italy and Spain which are currently struggling at their 2014 peaks.

So what accounts for Ireland’s separation from its fellow PIIGS? Many economists will point to the country’s aggressive austerity-driven approach to its economic reforms. While we are not economists, and don’t strive to be, we personally are sympathetic to such arguments and applaud such a commitment by the country. And though the nature of Ireland’s economic woes was somewhat different than the other PIIGS, their approach to reform should at least garner some consideration among other debt-burdened, economically-challenged countries.

Lastly, this post is not merely a St. Patrick’s Day backslap to Ireland. Let’s look at the Irish market’s prospects from this point. We mentioned in a post 1 year ago that the major factor impacting the Irish ISEQ Index at the time was the 38.2% Fibonacci Retracement of the 2007-2009 decline. Indeed, it was that precise area where the index topped out in February of last year. That level held until it was able to break out in December. The index has been on a tear since, rising 17% for the year to date to around 6100 currently. This happens to be one of the two key levels we are looking at in terms of potential resistance and/or targets (again, we don’t like to necessarily put “targets” on a chart; rather they are points of potential consequence should prices reach said level.)

The approximate 6100 level represents the next steps of progression following the 5100 level where the index was halted last year. Specifically, these key points lie in the vicinity of 6100:

The 50% Fibonacci Retracement of the 2007-2009 Decline ~6050

The 161.8% Fibonacci Projection of the 2009-2010 Rally ~6100

Should the ISEQ exceed this level, the next stop could be the 7000 area, highlighted by the following lines of importance.

The 61.8% Fibonacci Retracement of the 2007-2009 Decline ~7000

The 61.8% Fibonacci Projection of the 2011-2014 Rally ~7000

Whether or not the Irish ISEQ is able to sustain the 6100 level, or attain the 7000 level remains to be seen. However, on this St. Patrick’s Day, Ireland’s economy and stock market probably deserve a hand (or a pint) for their recovery from the depths reached in 2009. Perhaps the country can even secure its removal from the ranks of the “PIIGS”. At a minimum, Ireland at least deserves the title of “prized PIIG”.

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"Pink Pig" photo from Flickr.

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Originally posted on 3/17/14: stks.co/g0OwI.