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Are Equity Markets Getting Too Far Ahead of Themselves? IBEX 35 Forecast

Key Talking Points:

  • A blue wave is expected to deliver further fiscal stimulus as Kamala Harris will have the deciding vote in the Senate
  • Equity markets continue to push higher as investors look for higher returns
  • The IBEX 35 plays catch up to its European peers but still faces significant hurdles

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Equity markets have shrugged off political unrest in the US given they are looking past the current situation and focusing on the likelihood of further fiscal stimulus as a blue wave is confirmed after the Democrats managed to grab the two Senate seats up for election in Georgia, meaning Vice President Kamala Harris will have the deciding vote in a Senate with no majority leader.

Except for the tech-heavy Nasdaq, bracing itself for tax hikes on large corporations, US indices ended the session higher on Wednesday as investors look for income-generating assets, leading to further gains in Asia and a positive open in Europe. Undervalued stocks, predominantly those relating to the tourism and banking sectors, have been benefiting from risk-on sentiment, leading to lagged indices catching up to its peers, most notably the IBEX 35 and FTSE 100 in Europe.

Where do equity markets go from here is an important question. Overbought conditions have been showing for some time, regardless of cyclical corrections resetting the meter to some extent. Uncertainty has cleared up a fair bit in the last few weeks, mostly relating to US politics and Brexit, allowing for further gains to become feasible, but the coronavirus pandemic is still a significant threat to all economies worldwide.

Despite markets being forward-thinking, we have been jumping forward in time for some months thinking of the time when everything is back to normal, but the last few months have shown that there is no real clarity on when consumer activity can regain normalcy, and therefore we have no clue of how forward-thinking markets need to be in order to remain optimistic.

So one can expect a somewhat quick resolution to the health situation so that the economy falls in line with the surge in equity markets since the end of the summer, or a corrective phase in markets where risk is avoided and we see market prices fall more in line with the reality of the economic situation. Regardless, economic projections remain pretty vague at the moment, with most falling in line with a stagnant first quarter followed by a stronger recovery in Q2 as group immunity from vaccinations becomes relevant enough to stop sharp increases in new cases.

IBEX 35 Daily chart

Are Equity Markets Getting Too Far Ahead of Themselves? IBEX 35 Forecast

The Spanish equity index has seen an impressive run since the beginning of November when vaccine news was first published, gaining more than 30% since then. A significant victory for the IBEX 35 was the break above the 8,000 horizontal resistance area, which had been limiting gains since the drop back in March despite other major European indices being able to recover a large part of the losses from the pandemic during the summer period.

This meant the IBEX was undervalued and lagging other indices, which allows for further upside potential once significant barriers are cleared, which we saw since the beginning of November. Even now, the Spanish index has further territory to conquer before it gets in line with its peers, as long as it is able to clear its next hurdle at the 61.8% Fibonacci (8,450).

This is likely to remain a strong resistance but a break above this level would be a strong bullish signal in line with improving momentum indicators. Once achieved, the next objective would be the 76.4% Fibonacci at 9,075, although some resistance may appear around the 6,620 mark.

To the downside, the psychological 8,000 mark is likely to remain as strong support, but further downside may arise, meaning the 7,640 area would be the next key area. The 50-day simple moving average has recently been closely tracking the lower bounds of the daily trading ranges, which means the 8,080 could offer an area of short-term support.

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— Written by Daniela Sabin Hathorn, Market Analyst

Follow Daniela on Twitter @HathornSabin

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