MorningWord 6/11/15: Europe – The Final Countdown $FEZ

by Dan June 11, 2015 9:30 am • Commentary

Yesterday’s strong rally in the SPX was one of those head-scratchers. Although there was obvious technical support in the S&P500 (SPX) at 2045 and an up day was probably overdue, the strength of the bounce was surprising. But it’s not if you realize that the SPX is not driving the train, European equities are.

Taking a gander at the EuroStoxx 50 (SX5E) one can see the downtrend that had been in place since mid April when the index made a new 7 year high, until Tuesday afternoon’s reversal that marked an 11% peak to trough decline:

SX5E ytd chart from Bloomberg
SX5E ytd chart from Bloomberg

The intra-day reversal on Tuesday turned out to be a very powerful pivot just above support at 3400, yielding a 2 day rally of nearly 5% off of the lows:

SX5E 5 day chart from Bloomberg
SX5E 5 day chart from Bloomberg

But I would add that the index is still in the downtrend channel, both from the April highs, but much more significantly from the all time highs made in 2000:

SX5E 16 year chart from Bloomberg
SX5E 16 year chart from Bloomberg

Regular readers know that I am not in the camp that all QE is created equal, frontloaded or not.  It appears that European stocks ran ahead of ECB QE and have a little bit of a hangover the last couple months. One way to play is the FEZ (the Spyder EuroStoxx 50 etf), whose stock and options are very liquid.

A failure of the SX5E at the recent downtrend (not too far from here) could lead to a re-test of 3400, which would put the February breakout in jeopardy:

SX5E 2 yr chart from Bloomberg
SX5E 2 yr chart from Bloomberg

What could be a catalyst for a re-test? Oh I don’t know. But maybe it’s disappointment from a Greek debt deal falling apart and some sort of liquidity event like the ECB feared could happen later this summer? This was one of the reasons for the “frontloading” of QE this spring.

So for the time being I have my eye more trained on Euro equities than the U.S.