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Bubble Trouble In Argentina: Part 2

Summary

  • The Stock Market index (MERV) in Argentina continues to flirt with its all-time closing high and all time intra-day high.
  • Upward momentum on the weekly chart may be sufficient to carry the index a little higher into late May and early June.
  • If the global markets begin to sell-off during the summer, it is anticipated that MERV will follow and the bubble will burst.
  • Recently, the bubble in the MERV index has just moved into a classification called "Super" bubble which is considerably higher than most bubbles

The Stock Market index (MERV) in Argentina continues to flirt with its all-time closing high (May 7) and all time intra-day high (May 8) but has failed to close higher on the daily chart over the last week. On the weekly chart, the index did close a little higher on Friday May 16, maintaining upward momentum at the weekly level. This could be a point of exhaustion (just below the level of 7,000) or it could be the beginning of a new leg up that takes out 7,000 and continues higher for a few more weeks. However, it does look like the top of the bubble could be close.

Many indexes across global stock markets are at or near all-time highs, so its hard to believe that they will climb higher during the summer, in the same fashion that they did last year. More likely, the "Sell in May and go away" mantra will return this year and we will see a summer sell-off across markets including Argentina.

In the US, the yield on the 10 year note continues to fall, indicating that there is a continued move out of equity and into the safety of bonds. This would seem a natural move by serious investors prior to a move downwards over the summer, and perhaps into next year.

Finally, the model I use to determine whether a stock market index has formed a bubble does in fact classify bubbles according to size. Most bubbles (around 75% of bubbles) reach a consistent level before they eventually burst and deflate. A smaller number, around 20%, fall into the classification of "Super" bubble which are consistently larger than most stock market bubbles. Argentina has just reached the status of "Super" bubble in early May. The third and final classification above "Super" bubble is a "Mega" bubble which is rare and only happens in about 5% of bubbles through history. Since bubbles themselves are quite rare, then in fact "Mega" bubbles are themselves rare indeed.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.