From Dana Lyons’ Tumblr at jlfmi.tumblr.com:
The stock markets of the so-called PIIGS are breaking down on an absolute and relative basis – not a positive development for global markets.
The PIIGS are starting to squeal again in Europe. No, not the kind that produces pancetta or linquica or bangers. We are talking about the continent’s debt-laden, economically-challenged countries known by the acronym PIIGS, namely, Portugal, Ireland, Italy, Greece and Spain. These nations are essentially economic dead weight for Europe considering their plight. That said, all financial markets are cyclical – nothing straight-lines. And indeed, despite the apparent inevitable downfall that awaits the Eurozone as a result of the PIIGS, the associated equity markets have actually been quite buoyant for the better part of the last 4 years. Not so anymore.
We have posted before a composite that we constructed consisting of equally-weighted portions of each of the PIIGS’ stock markets. We call it…the PIIGS Composite. The composite starts in 2006 and hit an all-time low in June 2012, amid the Europe/PIIGS near-meltdown. Following Mr. Draghi’s “whatever it takes” moment, the PIIGS Composite shot up off the mat, rallying nearly 75% in 3 years before peaking in May of last year. Since then, the composite has gradually leaked lower. Around the start of the year, the leak turned into a gusher. As of this week, the PIIGS Composite is at near 3-year lows, approaching levels last seen in 2012.
The 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 year-long 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.
To continue reading: Euro PIIGS Starting To Squeal Again
