March 15, 2010

Eurozone ETFs vs S&P 500

(Click to enlarge the graphic).

US Domestic equities continue to rise - what of their European counterparts?

The six weekly percentage change charts above plot (left to right, top row then bottom) iShares MSCI Index ETFs for the United Kingdom (EWU), France (EWQ), Germany (EWG), Spain (EWP), Italy (EWI), and Switzerland (EWL). Overlaid on each chart in purple is the SPDR S&P 500 ETF Trust (SPY). The Oct 07 pivot high for the SPY (basis for the percent change), and most recent swing highs from Nov 09 - Jan 10 (depending on market) are plotted using red dashed vertical lines; the red dashed horizontal line intersects the SPY high from Oct 07 as well. Lastly, a Fibonacci retracement grid is plotted from the SPY pivot high to each individual market swing low so as to reference the current state of recovery in these markets from the US Domestic equity apex.

Arguably, each of these markets represents a developed nation. What first jumps out on these charts is the absolute breadth regarding the post Oct 07 selloff. No market was spared - yet there were subtle differences in performance. Beginning with Britain, the initial selloff was brisk, with the depth of shock to that market becoming more precipitous as events unfolded into early 08. When US Domestic markets rebounded (albeit slightly) in summer 08, British markets languished further downward, setting the tone for what became a much deeper selloff. More than two years since the Oct 07 high, the island nation remains well off its former highs. Despite a more robust rally during the Spring 08 bounce preceding the summer 08 move, both German and French markets fell in gear as well. While one can notice mild differences along the way, the two are inline with Britain as to their distance from former highs.

One would be hard pressed to label any of the remaining nations as emerging markets - yet we do see signs of volatility as one might expect in underdeveloped markets. To wit, look to the bottom row. Starting first with Spain, this market actually rallied (as did Latin markets) into the 07 close. Combined with a strong rebound during the spring 08 rally, the Spanish market was able to shrug off its wayward performance in summer 08 to end approximately off as much as US Domestic equities in Mar 09. The rally off that bottom accelerated in summer 09, before giving way to what presents as the most impressive selloff among European nations plotted herein. Clearly, this is a traders market with sustainable volatility and perhaps a beta play as regards one's bias.

Italian markets, and certainly those of Switzerland, did give flashes of trouble during Apr 07 - Oct 07. For months, each of these countries failed to break above former highs, repeatedly meeting resistance before falling in line with US Domestic Equities. Their performance since, however, has been anything but "in line" with one another, as Italian markets collapsed greater than every other chart. As a result, recent swing highs for this market formed in Oct 09 vice Nov 09 for Britain, Germany, France and Spain. Italy is plainly devalued, from an equity perspective, and appears more vulnerable than most. Those looking for equity shorts may be better served targeting this market when seeking weakness as opposed to others that have "further to fall" from current levels.

The outlier here is Switzerland, as its rebound to date since Mar 09 has outpaced everything on the chart. As US Domestic equities fell in early 08, Swiss markets actually held their own longer. While no on escaped the collapse of Oct 08 - Mar 09, Swiss markets have been able to sustain its acceleration off last year's lows. Every other European nation remains at least twice as far off their respective highs than does Switzerland, both those from Oct 07 and Jan 10. For those looking for strength outside US Domestic equties, or those seeking a hedge against shorting the S&P 500, the Switzerland ETF poses a solid option.

As technicians look to make sense of US Domestic equities in the weeks ahead, using a broader European index is inadvisable. The behavior of individual markets might offer earlier clues as to where markets may be headed in Q2 and beyond. The S&P 500, which appears to be breaking out once again to the high side, is approaching a key resistance level near the 61.8% retracement off its Oct 07 high. But for Switzerland, these European nations appear to be telling a story different than that of US Domestic equities, and most rallies look long in the tooth. As occurred at the last major high in Oct 07, Europe could be signaling a change is afoot, so technicians would be wise to assess their risk parameters heading into the next quarter. Markets can, however, remain overbought for months - hence, a strong hedging strategy is suggested.

Jeffery E. Lay, CMT
President
Talon Eight, LLC

Disclaimer: This post is intended solely to disseminate information, and is not, and shall not be construed to constitute financial, investment or other similar advice. All posted material should be independently verified for accuracy and current applicability. Readers of this post are referred to the Risk Disclosure for further information.

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