Week in Review: Greece, Goldman and Volcanic Ash

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 |  Includes: AAPL, BCS, GS, IGOV, ISHG, MER
by: Proactive Investor

By Mark Allen

A glance at the below chart of the FTSE 100 shows that it has been a cautious week for equities, as Goldman Sachs (NYSE:GS) fraud charges, heightened concerns about Greece and the impact of the volcanic ash cloud impact investor’s sentiment.

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News of the US Securities and Exchange Commissions (SEC) charges against Goldman Sachs were felt across equity markets earlier in the week, as the prospect of tighter regulation on the financial sector prompted a broad reduction in risk exposure.

The global recovery story was boosted by a wave of positive earnings reports from a range of US bellweather companies. Morgan Stanley (NYSE:MS), Citigroup (NYSE:C), Goldman Sachs, Apple (NASDAQ:AAPL) and many others posted a range of better than forecast first quarter results.

Global economic data remains mixed, with the Conference Board’s index of leading indicator’s, a gauge of the likely near term performance of the US economy, rose by 1.4% in February, its twelfth successive advance and the strongest report since the Lehman crisis.

However, UK unemployment rose by 43,000 in the three months to February, which is the highest figure for more than 15 years, according to the Office for National Statistics (ONS). Unemployment is a lagging indicator, but the higher than forecast rise to 8% of the population highlights the fragile state of the UK economy.

Furthermore, British retail sales grew at a slower pace than forecast in March, with a rise of 0.4%, coming in below the 0.7% expected by analysts. Combine this with the disappointing unemployment data and it provides evidence that the much needs consumer recovery remains subdued.

This week’s figures from Eurostat on the Greek budget deficit triggered a fresh bout of nervousness, as it revealed that the country had a deficit of 13.6% of gross domestic product (GDP) in 2009, above the 12.7% previously reported. Greek debt also rose to 115.1% of GDP in 2009 from 99.2% in 2008. Moody’s investor service downgraded its rating on Greece’s sovereign debt this week and warns that further downgrades could be in the offering.

The yield on the Greek 10 year government bond climbed past 8% to the highest level for 12 years, as confidence in the economy continued to decline. Contagion also spread to Spain and Portugal as investors grew more cautious about the heightened fears of sovereign risk default throughout the eurozone.

The technicals have been pointing to overbought conditions for some time and this week’s correction has triggered a few sell signals. The relative strength index (RSI) is trending lower to fresh 6 week lows, indicating a rapid fall in buying momentum.

The moving average convergence divergence (MACD) histogram is also stepping further into negative territory, with the moving averages declining at a sharper rate, suggesting that a new downtrend may be underway. Initial support is seen at 5600 and a break below this could trigger a sharp retracement towards 5400.

In summary, there remain many macro-economic headwinds, which a complacent equity market might be underestimating. I believe the negatives are building and this is reflected by the bearish technical outlook.

In light of the above analysis, I have been focusing on stocks that could be vulnerable in the short term by tighter regulation within the financial sector. The majority of the major US banks have now published their results and the boost this had had on the wider market is likely to be mostly priced in, as the FTSE reached 22 months highs recently. Barclays (NYSE:BCS) has risen around 50% since mid-February…

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As can be seen from the above chart of Barclays the recent rally has taken the shares back up towards 400p, where they have historically encountered strong resistance and appear to be faltering once again.

Similar to that of the FTSE 100, the technical oscillators have rolled over and appear to be trending lower. The RSI and stochastic have been declining over recent weeks and diverging away from the underlying share price. Both are now trading at fresh short term lows, indicating that the buying momentum is rapidly declining.

After a strong run for equities, I believe the markets are due a short term correction and the uncertainty surrounding the proposed banking reform and escalating sovereign default risk, which many of the banks have exposure too, is likely to impact the financial sector.

Barclays is high beta and given the vulnerable technical oscillators and the close proximity of major historical support, I am inclined to suggest the shares offer a short term trading opportunity to the downside.

Disclosure: No positions