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The Spanish stock market is the worst performing of the world's major markets this year, down more than 20 per cent, just the kind of thing that gets contrarian thinking going.

Stocks in Spain have fallen so much they're roughly back to the same levels as in March, 2009, during the most gloomy point in the financial crisis. That makes Spain the only big market currently trading at levels that back then turned out to be a brilliant buying opportunity because of the extreme levels of pessimism. Share prices are also down by more than half from their all-time high, reached in late 2007.

Value seems to be building up, too. Spanish business publication recently noted that stock prices are so depressed that eight of the 10 largest listed companies in the country trade below their book value.

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The biggest company on the Spanish market, telecom giant Telefonica SA, has a yield of around 12 per cent, based on last year's payout. BCE, the equivalent stock on the Toronto market, has a yield of about 5.4 per cent, while Telefonica has the added bonus of offering exposure to Latin America's rapidly growing telecommunications market.

Even one of the world's great contrarian investors, Marc Faber, publisher of the Gloom Boom and Doom Report, recently had some moderately kind thing to say about the country, along with some others in beaten down European markets, provided an investor was in a speculative frame of mind.

"If someone really wanted to take speculative positions, he should look to quality non-financial stocks in countries such as Spain, Italy, France, Greece, and so forth," Mr. Faber told Bloomberg Television.

And despite the thick air of gloom, Mr. Faber thinks there might be a bounce upward in some of these stocks because they're so oversold. " I think a rebound is coming," he said.

The easiest way to play the general trend in the Spanish market is through an ETF, the iShares MSCI Spain Index Fund on the New York Stock Exchange.

But valuations aside, there remain danger signals in the Spanish market, even for the speculative, contrarian investor.

For those who follow technical analysis, the Spanish market, tracked by the index for its major companies, the IBEX, is flashing a warning sign. Despite their pronounced, recent weakness, Spanish shares haven't yet broken sharply below the levels reached during the financial crisis three years ago. Under technical analysis, if a chart pattern manages to hold above a significant low point, it's a bullish sign, but if it falls through, the outlook is negative.

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In trading on Tuesday, the IBEX closed at 6,701, more or less matching the 2009 low of 6,703. If the market starts to trade convincingly below the 2009 lows "then really all bets are off and technically we're looking for further declines," says Michael Hewson, senior market analyst at CMC Markets in London.

Mr. Hewson is skeptical about the immediate case for buying Spanish stocks, which he compares to "trying to catch a falling knife." He'd prefer to see the stocks bottom out and then start moving up, calling it a safer way to play the market. Among the sectors of the Spanish market, he's leery about investing in bank stocks, based on concerns that no one really knows what kind of hit they'll ultimately have to take from the bursting of the Spanish real estate bubble. "I wouldn't touch Spanish banks with a barge pole," he says.

While most investors might try to play the Spanish market through an ETF, some value investors have moved into individual stocks.

Southeastern Asset Management Inc., a U.S. money manager, has taken positions in Ferrovial, owner of London's Heathrow Airport and Highway 407 in Toronto. Southeastern calls the holdings "two of the best infrastructure assets in the world."

On the more controversial side, Southeastern also likes ACS, a Madrid-based engineering giant that is one of the world's largest construction companies. The knock against ACS is that it has high debt levels, but Southeastern said in a recent report to its fund holders that concerns over the ACS's borrowing are overdone.

There is a big wild card for Spanish investing – the possible breakup of the euro or contagion spreading from Greece. But that has to be balanced against the reality that policy makers in Europe haven't allowed the continent to slide into chaos and at critical points have always intervened to prevent markets from melting down.

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