Over the past months, the psychology of the markets has been changing in a way we haven’t seen in many years. The bears, are all convinced that Greece, Spain and the rest of Europe will drag the world into the abyss. We have been rather bearish on the PIIGS situation, but have changed our view during the past month, as we simply have been encountering the shift in psychology in the markets. The crowded trade is being a Euro sceptic. This has proved rather costly during June, especially when it comes to the Spanish equities space. Too many “smart” shorts have entered doomsday short positions, and are now feeling the pain. Although we don’t expect the equities markets to go massively higher in the short term, one shouldn’t rule out a break out to the upside later this autumn. If SPX starts flirting with the old highs, many will start sweating, especially as the “crowd” has abandoned the equities space over the past years. Some more on the tilted psychology via Gresham’s Law.
This can happen in two ways. In the first (and most relevant) instance people can simply overdo the downside and realize that the depths of a depression are not a permanent condition of reality. The second may perhaps come later; as it is – for want of a better word – greed. We expect that the memory of debt-deflation would have to be purged from the mind of the investor before the latter can have a chance of taking hold once more. The world still has a case of ‘2008 on the brain’ / ‘2009 on the mind.