Trader's Diary

September 14, 2012 6:10 pm

Unfinished business in Greece

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Investor attention may soon switch back to southern Europe
David Schwartz

The Federal Reserve and German Constitutional Court generated last week’s main headlines. They also caused some investors to overlook fresh developments in another important story.

When it comes to Greece, the gap between rhetoric and reality is widening. Statements from European leaders confirm their desire to keep Greece in the Euro but a steady flow of information from other sources suggests a Greek exit is approaching.

UK equities

UK equities

One important straw in the wind is a change in sentiment among European voters. The number supporting another Greece bailout continues to shrink. The focus of their anger is also shifting. Voters fumed in the past that Greece did not deserve further help. But a growing number now worry about negative effects upon their own financial health.

For its part in this saga, Greece failed, yet again, to implement a series of promised spending cuts a few days ago.

Here is another revealing incident that illustrates the intractability of Greece’s problems. The island of Hydra, not far from Athens, was recently visited by a group of tax officials in response to the low level of tax receipts being submitted by local merchants.

As a result of their investigation, a restaurant owner was taken to a local police station for an alleged tax fiddle. Angry local residents rioted and besieged the building, cutting off its water and electricity feeds.

The government was forced to send a naval ship and armed riot police to the island to rescue tax officials and get the taverna owner off the island.

In another revealing incident, a European politician poured cold water on the assumption that his fellow politicians do not know how to solve the crisis. According to him, they know exactly what needs to be done. Their real problem is getting re-elected if the necessary steps are taken.

Evidence from different non-official sources keep steering me in the same direction. I suspect it is just a question of time before Greece leaves the euro. The big question we must face is deciding how the financial markets will react to the eventual exit. Several stock market trends hint to me that the long-term effect will be small.

Since 2012 began, the FTSE 100 has risen by just 6 per cent. But under the surface, there are two markedly different sub-trends that affect our stock market.

So-called defensive sectors such as utilities, tobacco and pharmaceuticals have barely shifted since the start of the year. Most of the profits are down to rallies in cyclical sectors that typically rise or fall in step with the broad economic cycle. Chemical shares have gained 35 per cent since the year began. Electronic equipment shares are up 31 per cent. Software rose by 24 per cent. This trend continues right to the present. All three sectors outperformed the defensive laggards in the last few weeks.

In case you are wondering, the banking sector played no role in holding back the FTSE 100. Despite admissions of poor behaviour and a steady flow of negative headlines, banking shares have gained 17 per cent since the year began, well ahead of the Footsie’s gain.

These trends send a clear message. In the face of upsetting economic and political headlines throughout 2012, investors remain remarkably positive about stock market prospects in economically sensitive sectors.

I have little doubt that Greece’s euro departure will trigger a sudden knee-jerk reaction. But the sector price trends suggest to me that investors either don’t care about a Greek exit or have already factored it into the price. Either way, I suspect that any negative reaction might quickly run its course.

On the other hand, prospects for the near-term look mixed, despite the Fed’s largesse. Some chartists claim the FTSE 100 price trend is approaching a minor resistance area and looks a bit toppy.

I’m finding it difficult to spot shares priced low enough to encourage me to buy. Past experience teaches me to treat this pattern as a yellow-flag warning signal. It does not guarantee a price drop, but times like this often precede short-term weakness.

One other short-term worry is the recent emergence of a weak price trend around this point in the month. The UK stock market fell in nine of the past 13 years from September 19-24. There are no guarantees in any single year, of course, but it is yet another reason to be cautious.


Stock market historian David Schwartz is an active short-term trader writing about his own trades

tradersdiary@ft.com

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