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March 13, 2017 | Posted by David Zarling, Head of Investment Research

This Is How European Stocks Could Lead Global Markets Higher

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Since the Great Financial Crisis (GFC) of 2008-2009, one of the few places to find return on capital was in the U.S. equity markets. Many other markets, including Europe, have been a hot mess since the GFC abated and U.S. Markets bottomed in March, 2009. Don’t get me wrong, you could’ve made money in European stocks from 2009-2014, but not at the same pace as in U.S. markets. For example, in 2013, while U.S. stocks were breaking the highs from 2007 and recording new 13-year-highs, European stocks were still 20% below their 2007 highs. We can clearly see this underperformance in the chart below.

European Stocks and US Stock Market Comparison

It’s not a matter of opinion that European stocks underperformed for the last 8 years. Charts don’t lie. If you wanted to be part of strongly upward trending markets and generate return, you should have been in U.S. stocks. That may be about to change. Over the past few months, we’ve seen two important developments take shape which would underpin Europe’s potential outperformance over U.S. equities. The first, and possibly most significant development, is the recent breakout of the Financial Times Stock Exchange (FTSE). One of the world’s largest exchanges has broken out to new all-time-highs. The last time we checked, all-time-highs are not a characteristic of downtrends. Check it out.

London FTSE Exchange 17-year breakout

After 17 years of going everywhere yet nowhere, the London Financial Times Index broke out to new highs in December 2016. This took place after financial media outlets told us the Brexit vote was a disaster. Rare was the pundit who thought the UK leaving the European Union was a positive development. Since then, the FTSE has rallied 25%. Markets know more than we do. And they certainly know more than the financial media.  The break above 7000 on this important index should be respected. The longer we stay above that level, the more significant this move is. When there is enough demand to push prices out of a 17-year base, we should take heed. From wide bases come high spaces. The first initial upward target is 8000. If it can surpass that level, 10500 is on the table. A retest of 7000 is always possible. We’ll know this thesis is wrong if FTSE drops back below 6800.

The second development of the past few months is the improvement in European Financials. Without this important sector, it would be hard for Europe to muster a rally worth participating in. Higher prices in European Financial stocks bode well for Europe overall. Here’s the hard data:

European Financials Weekly Chart

Never discount coincidence. The “disastrous” Brexit vote marked a four-year low for European Financials, confirming a good-looking divergence between momentum (using 14-period RSI) and price. This is classic reversal behavior. Just when the media and investors think they have it figured out, sellers become exhausted with only buyers remaining. Similarly, the media frenzy over Deutsch Bank marked the beginning of a breakout from a downtrend (annotated with green downtrend line). As market participants, we need to turn off the TV and log off of financial media websites. Focus on price instead. It’s the only thing that pays. We don’t make money in the market by how many financial media articles we read or pundits we listen to. We make money by making decisions based on the economic law of supply and demand. More supply than demand, price goes down. More demand than supply, price goes up. Price knows everything we need to know. It pays to use it to make decisions.

When we look at European stocks using an ETF that tracks the S&P European 350 Index (ticker: IEV), we see it breaking out on an absolute basis. Back in early 2017, IEV broke through an important level of supply near the 39-40 handle.

European stocks IEV weekly chart

The longer IEV can stay above 40, the better. The next level of resistance comes into play near the solid green trendline. There’s no reason to be involved with this one below $39.

From a relative strength perspective, IEV still has work to do when comparing it against the S&P 500 (proxy: SPY). Looking at the daily ratio chart of IEV:SPY, the downtrend in relative strength is obvious. This chart only goes back 1.5 years, but the downtrend versus the S&P 500 has been ongoing since 2008.

Europe 350 : S&P 500 ratio chart

The ratio low in early March established a higher low above the December 2016 low. That’s a start, but not too exciting until the green down trendline is breached. A break above that level increases the likelihood of establishing a higher high above February’s high. That would confirm a change in trend.

In summary, nothing is guaranteed, but the aforementioned weight-of-evidence is compelling. Not just for high prices in European stocks, but for outperformance over U.S. stocks. Something investors haven’t seen in over eight years.

As always, you can get free real-time updates and commentary about this opportunity and many more here: @360Research

AND, you’ve got FREE access to an investing tool we’ve created, The Ultimate ETF Cheat Sheet. It’s an easy-to-use resource guide.


Disclaimer: Nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. You invest based on your own decisions. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer.

Filed Under: Breakout, Equity, ETF, Europe, International, Market Outlook, Relative Strength Analysis, United Kingdom Tagged With: $EUFN, $IEV, $SPX, $SPY, DB, Deutsche Bank, European Stocks, FTSE, S&P Europe 350

February 17, 2015 | Posted by David Zarling, Head of Investment Research

Stay Calm And Break Out? London Financial Times Index On The Verge

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If you initiated positions in the London Financial Times Index back in the year 2000, you would now be back to even. This index, representing the 100 largest publicly traded companies in the United Kingdom, just reached 6898.13, its highest close since 1999 (6950.60). That’s 15 years ago if you need to do the maths like me! After a decade and a half, and two steep price corrections, the FTSE is at par. Some investors might call the past 15 years exhausting. Others might call it consolidation. If the latter, then we may be on the verge of an opportunity. From a big picture perspective, you can see the magnitude of this price action in the first chart below, which holds the monthly price candlesticks from 1990 through today.

FTSE Monthly 15 years

When we zoom in to the weekly chart (see below), we find that the British index has been battling the 6800-6890 level for about 2 years. This level is overhead resistance – where sellers show up and cause the price to stagnate, retrace, and find demand. As a reminder, price is the work of supply and demand. More supply than demand, price goes down. More demand than supply, price goes up. For nearly 24 months, the 6800-6890 level has provided plenty of supply.

FTSE Weekly Supply and Demand

Digging deeper into the index on the daily chart (see below), the significance of this level can be clearly seen. We are on the tenth attempt to break this level. The more times price attempts to break through resistance, the weaker that area of supply becomes. Today, we may have witnessed the breakthrough. If that’s the case, the opportunity ramifications are large. The longer the base (2 years -or- 15 years!), the higher the space. If this breakout holds and does not prove to be a false breakout (closing below 6800), then the initial price target is 7700, 12% above current levels. The risk is well defined as we don’t want any exposure below 6800. A risk of 1% for a gain of 12%. Not bad.

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FTSE Daily Breakout?

Filed Under: Breakout, Equity, Europe, False Move, International, Pattern Recognition, United Kingdom Tagged With: Consolidation, demand, FTSE, London Financial Times Index, Resistance, Supply

January 8, 2015 | Posted by David Zarling, Head of Investment Research

Relative Rotation Shows US Equities Leading | Opportunities Possible in Europe and China

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We live in the golden age of investing. Never before have individual investors had so much available to them for gaining investment knowledge, finding great investment opportunities, and the ability to take advantage of them at such a low cost. Our parents could only dream of having investment communities like seekingalph.com, investment blogs like [shameless plug alert] opportunityidentified.com, almost limitless fundamental information online, and technical analysis tools like stockcharts.com only one click of a mouse (“what’s that?” says your grandpa) away. And with the advent of ETFs, common investors can invest in pretty much whatever and wherever they want. Want to buy timber? Go for it. There’s an ETF for that (WOOD). How about palladium? Got you covered (PALL). Want to invest in foreign markets like South Korea? Be my guest (EWY). Do you really like coffee? Try JO. With sugar? Sure! (SGG). Investors today have the investment world at their fingertips.

At 360 Investment Research, we like to take advantage of another amazing tool available to all who want to use it: Relative Rotation Graphs (RRG) Charts™ [1]. These charts show you a security’s relative strength and momentum relative to a collection of other securities. Developed by Julius de Kempenaer of RRG Research, RRGs help us identify where we should be invested, or be looking to invest, within a universe of investments. Decisions should not be based solely on RRG analysis, but these charts definitely help us focus on those areas of the investment universe that deserve it. They give us the big picture within one picture. We appreciate their usefulness and you should too.

In this week’s RRG™ analysis, we’re going to look at the relative strength of the world’s largest markets, using the total world ETF from Vanguard (VT) as our benchmark. Basically, we want to see where in the world we should be focusing our attention. Accordingly, the following ETFs representing most of the world’s largest stock markets will be compared against VT:

  • SPY (S&P 500)
  • VTI (U.S. Total Market)
  • EWC (Canada)
  • EWQ (France)
  • EWG (Germancy)
  • EWI (Italy)
  • EWP (Spain)
  • FEZ (Europe)
  • PIN (India)
  • GXC (China)
  • MCHI (China)
  • EWY (South Korea)
  • EWH (Hong Kong)
  • EWJ (Japan)
  • EWA (Australia)
  • RSX (Russia)

Generally speaking, when looking at the ETFs above in the RRG™ below, those in the green leading quadrant are what you want to own; those within the yellow weakening quadrant should be on your watch-list (as they might be deteriorating), those within the red lagging quadrant should be avoided and those in the blue improving quadrant should be on your shopping list.

In the RRG™ below, the long tails represent the movement of each country’s ETF over the past 10 weeks in comparison to the world ETF, VT. So what do we see? The first thing to notice is the chart of VT in the upper right corner. Global stocks as a whole are down since July. Accordingly, when we analyze this chart, we want to be cognizant of the fact that maybe stocks as a whole are not where we want to be. That being said, if we are looking for stock opportunities, we see that we should be in the US (SPY and VTI have been leading the last 10 weeks) and looking for potential opportunities in Germany (EWG), France (EWQ), and Europe (FEZ) as they have moved from lagging to improving over the past 10 weeks. And finally, we should also look to China (GXC and MCHI) as they are subtly rotating from weakness towards leading.

In conclusion, if we have to be in stocks, we should be in the United States and looking for potential opportunities in Germany, France, Europe, and China.

[1]  Note: The terms “Relative Rotation Graph” and “RRG” are registered trademarks of RRG Research.

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(click chart to enlarge)

RRG Analysis of Global Stocks

Filed Under: China, Emerging Markets, Equity, Europe, International, Market Outlook, Other, Relative Strength Analysis, Rotational Regression Graphs, Techniques & Tactics Tagged With: $EWA, $EWC, $EWG, $EWH, $EWI, $EWJ, $EWP, $EWQ, $EWY, $FEZ, $GXC, $MCHI, $PIN, $VT, $VTI, Australia, Canada, China, ETF, ETFs, Europe, France, Germany, Global Stocks, Hong Kong, India, Italy, Julius de Kempenaer, Relative Rotation Graph, RRG, RRG Research, RSX, Russia, S&P 500, South Korea, Spain, SPY, U.S. Total Market

November 16, 2014 | Posted by David Zarling, Head of Investment Research

It’s Just US Against the World [Weight of Evidence, Part 3 of 7]

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Weight of Evidence: Part 1 | Part 2 | Part 3 | Part 4 | Part 5 | Part 6 | Part 7

At 360 Investment Research, we believe price is the manifestation of opinion and final arbiter of value. That is, price has the final say. It doesn’t matter if we think price should be lower or higher from a fundamental perspective. No matter the security (stocks, bonds, currencies, commodities, whatever), price determines value. Opinions don’t matter. Price matters. Period.

One of the exercises we go through is to look at equity indexes across the globe to see if we can find opportunities or confirm price action happening in the largest equities market in the world – the United States. If stocks in the US are making new highs, we like to see stocks making new highs elsewhere in the world. If the US market is doing well and so are some other countries, that bodes well for the global economy. However, if we see the rest of the world lagging behind, we find that to be a warning sign. We are currently in this situation now. When we look across the globe, all major indexes (except for Nikkei, S&P 500, and the DOW) are making new lows or lower highs. Not higher highs. Take a look at the chart summary below (click it to embiggen), which condenses charts of the most important stock indexes in the world (some are ETF proxies). It is quite telling. The Dow Jones, S&P 500, and the Nikkei (Japan) are the only indexes making new highs. We’d like to see more countries join the party by making new highs along with the US. Needless to say, we will be paying close attention to prices across the globe with a keen eye on the United States. You should be watching price action closely too.

Check back soon for part 4 in our 7 part series.

Weight of Evidence: Part 1 | Part 2 | Part 3 | Part 4 | Part 5 | Part 6 | Part 7

11-16-2014 World Tour [weight of evidence, 3 of 7]

Filed Under: Equity, Europe, International, Market Outlook, Relative Strength Analysis Tagged With: $BVSP, $CAC, $DAX, $EEM, $EWA, $EWI, $EWW, $FEZ, $HSCEI, $HSI, $IDDOW, $INDU, $KOPSI, $NIKK, $PIN, $SMSI, $SPX, $STI, $TSX, $VEU, Global Indexes, Higher High, RSX

July 9, 2014 | Posted by David Zarling, Head of Investment Research

Keep Calm and Carry On?

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Of late, the FTSE (London Times Stock Exchange) has been struggling to make new highs. When looking to the left on the daily chart, we see that lower highs and lower lows (even though minimal) are beginning to accumulate. In addition, this level appears to bring out plenty of supply (sellers). The overall trend is up, but tightening within an ascending triangle. This price action makes us sit up and take notice. A substantial move could be in the works within the next three months. The FTSE has struggled since early 2013 to clear the 2008 highs. We’d like to see this index break upward (or at minimum, hold this level) to confirm all other current global equity bull markets.  If FTSE breaks down, it will cause us to watch all other global equity markets (most notably, the US) with more scrutiny. Keep calm, curious investor.

Keep calm and carry on?
Keep calm and carry on?

Filed Under: Equity, Europe, International, Market Outlook, Supply and Demand, United Kingdom Tagged With: Ascending Triangle, FTSE, Lower High, Lower Low, Supply

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