A Bubble Builds in Greece

Greece is almost a synonym for unending economic crisis. But despite the problems, investors are buying Greek stocks.

Greece is almost a synonym for unending economic crisis. Its gross domestic product remains 27% below its 2007 high. Unemployment is still at 22.6%, according to the latest data.

Despite the problems, investors are buying Greek stocks. The chart below shows the Dow Jones Global Indexes Greece Stock Index, a benchmark for the country. The one-year rate of change (ROC) in the index is at the bottom of the chart. Vertical blue lines mark the ROC’s moves above 40%.

Greece is almost a synonym for unending economic crisis. But despite the problems, investors are buying Greek stocks.

The one-year ROC is a bubble indicator. When stocks rise faster than 40% a year, it is just too fast. That pace cannot be sustained, and we almost always see a market sell-off after this happens, even if it doesn’t always occur immediately.

The chart shows six previous occurrences, and each one was associated with a market decline. This isn’t unique to Greece. The 40% level in the one-year ROC preceded sell-offs in other markets, including the U.S. stock market.

All that’s needed is a catalyst for the selling to begin. In Greece, the catalyst may arrive as soon as this week.

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CNBC is reporting that the Greek government may issue bonds before the end of July. This would mark the first time since 2014 that Greece issued bonds.

The country’s finances are still perilous. Greece made minimum payments on old debts this summer only because the euro zone agreed to give the country €8.5 billion ($9.2 billion).

Stock market investors may realize the government is tapping the bond market to continue avoiding fiscal responsibility. With the stock market flashing a bubble warning, the sell-off that follows could be steep.

Regards,

Michael Carr, CMT
Editor, Peak Velocity Trader

  • Renilen

    I think you’ve “got the picture”! Pity those who aren’t familiar with Greece (should I say “Grease”?). You’re correct: The current Greek government only made its sovereign debt payments this month because the country’s European creditors agreed to release funds which had been withheld from “the third bailout of Greece” (“MoU3”) due to the government’s FAILURE to satisfy the creditors’ performance requirements. Greece went to the brink of default on those debt obligations.

    I also think you’re “right on the money” about the current Greek government’s use of new sovereign debt sales as a means of evading fiscal responsibility. This is a “radical hard left” government. They’re now talking about attracting foreign investment! Pray tell, what do these hard-left hacks know about investment? Do they truly accept the principles of free-market capitalism or do they think they’re “leading Greece to socialism,” in the Venezuelan mode?

    Even observers who’ve only skimmed the headlines of the news of Greece would have seen how stubbornly the ministers of the current Greek government have resisted the demands of Greece’s creditors about privatization of state-owned assets. Etc. ad nauseam. Invest with leftists who regard you as “the class enemy”? That doesn’t sound like a good idea to me.

  • jringo55

    People in America are falling for the same things people in GREECE did. To assume any nation can forever thrive on borrowing, not paying the debts but adding to interest payments on the debt are highly disallusioned. America is not special. America is equal to any other nation on earth. America will have a day of reckining, just like GREECE did. The IMF will be there but the cost will be heavy upon the masses. As always, the people at the top will escape but those at the bottom and most of the middle will be sacrificed.