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Why aren't European Stocks Making New Highs Like the Dow?

Mar 15, 2013
Chad Karnes, CMT

While the public's attention has been directed toward new highs in U.S. stock benchmarks like the Dow Industrials, European stocks are making new lows for the year. Why is it happening and where's the next big opportunity for investors?

With the hoopla of the Dow Industrials making new all time highs, it seems the financial media has forgotten about the rest of the world, in particular Europe. 

Did you know that European stocks are on the verge of turning negative for the year (joining China, the Euro, and emerging markets which are already there)? 

It is not surprising Europe has taken a backseat given the onslaught of “news” covering the Dow’s all time high, but their weakness may be a warning sign that U.S. markets may follow to the downside.

In the Meantime, Here is What Happened

While we are getting our daily dose of euphoria and Dow 20,000 from America’s cheerleaders, the rest of the world is a different story.  Negative fundamentals continue in China, and Europe’s problems are no more nearer being solved than they were last year, last month, or last week. (And it shows in the charts.)

In this first chart I show the Vanguard Europe ETF (NYSEARCA:VGK), a popular iShares FTSE China 25 ETF (NYSEARCA:FXI), the iShares MSCI Emerging Markets ETF (NYSEARCA:EEM), and the Euro (NYSEARCA:FXE) since the beginning of the year.

The Chinese market is down over 7%, Emerging Markets are down almost 3%, the Euro is down 2%, and the European markets topped on 2/1, 3% higher than they are today and up less than 3% YTD.  This compares to the Dow (NYSEARCA:DIA) which is up over 10%.

Shorting the Euro

On 2/24 in the ETF Technical Forecast we identified the Euro as confirming a downtrend as it “took out the mid-term uptrend line from the November lows.  Short stops can be placed above next month’s pivot, currently at $1.3350”.

The following chart accompanied the previous 2/20 forecast along with the trendline sell setup at $1.3289.

What’s Next

We have written a few times about the high correlations between the European and U.S. markets (found here and here for instance).  The Euro has continued its decline and now sits around $1.2975, but the U.S. markets have yet to follow its lead.  As the rest of the world sells off, America is the lone shining star, but that is likely to be short lived. 

Combining the fall in the Euro and European stocks with the continued rally in U.S. equities helped us identify in the latest ETF Technical Forecast a Pairs Trade (buy one stock and short another) that can take advantage of such a current anomaly of non-correlation between the U.S. and Europe. 

Such a trade helps keep risk a lot lower as investment exposure hovers near market neutral.  We are also focused on price levels that will help us identify a top in the U.S. markets and an expected relief rally in the Euro.

The ETF Profit Strategy Newsletter filters out the noise by using technical analysis and data based decision-making techniques to keep us on the right side of markets.  A few times each week we update our subscribers on actionable high probability trading setups that also identify risks and profit targets like those for the Euro, European & U.S. stocks, and their tradable ETFs. 

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