A Trip Around Europe

I was on my Honeymoon in Europe recently. We visited Paris, London, Brussels and Amsterdam and saw some truly amazing sites. It also prompted me to find some equally fantastic charts of European assets - which I only looked at during travel time, on the trains and planes, of course. But seriously, as someone who loves to travel, I think it is a fantastic exercise to pay attention to the local businesses wherever you are and look up information about them and of course their stock charts. You'd be surprised how many are public companies. I found an obscure Peruvian mining company this way and it has been one of my better investments over the years!

When I looked at the Indexes and ETFs of the European countries I visited among others, I was taken back by the bullish price action as many of the charts are threatening to break out of multi-year or even multi-decade consolidations, if they’ve not already done so.

The diversified STOXX Europe 600 Index ($SXXP) is about as good a representation of the region as you'll find with holdings that range from small to mega cap companies from 17 countries. The index represents about 90% of the total European stock market capitalization.

As you can see, the STOXX Europe 600 Index just recently made a fresh multi-year high as it once again flirts with critical resistance near the 400 level. Prices have failed several times at these key prior highs over the past several years but are currently trading slightly above them. After 20-years of sideways action, one of the most important indexes for European Equities looks poised to break out of a major base. This is an excellent illustration of the price action in much of Europe since the turn of the century and if prices can finally sustain these record highs it would be a positive development not only for Eurozone Equities but Global Equities more broadly.

So let’s look at some other European Indexes.

When visiting the London Stock Exchange I thought of how the FTSE 100 (UKX) recently broke out of a multi-decade base after going nowhere for years - and how interesting it is to see similar massive consolidations in the foreign indexes of London's neighboring markets, especially the STOXX 600.

As you can see in the chart of the FTSE 100 ($UKX), prices are currently consolidating above former resistance that became support when prices breached their key prior highs in 2016. With the underlying trend higher we have no reason to doubt this breakout and considering the price action around Europe, we think the higher probability outcome is that the $SXXP chart eventually resolves higher as well. If you were to overlay the two price series you’d find they look nearly identical which makes sense due to the heavy overlap as 27% of the STOXX 600 is comprised of United Kingdom holdings.

While in Paris I couldn't help but notice the CAC 40 Index ($CAC) recently registered its highest high since 2007 and even more impressively, the Amsterdam Exchange ($AEX) is trading at its highest level in nearly 20 years.

This action isn’t just isolated to the countries I visited. Some of Europe’s chief economies, Germany ($DAX), Switzerland ($SMI) and Sweden ($OMX), have also recently emerged out of enormous consolidations and registered fresh highs. Here are 8-year performance charts of their respective indexes.

So if major markets like London ($UKX), France ($CAC), Germany ($DAX), Switzerland ($SMI), Sweden ($OMX) and Amsterdam ($AEX) are all breaking out of long-term consolidations to fresh record highs, the weight of the evidence strongly suggests that other European Equity markets, including the STOXX 600 should follow suit. What’s more, is this kind of price action is likely to occur in an environment where Equities around the globe are trending higher, not lower.

Seeing so many International Markets resolve higher after trending sideways for so long is a critical development as many bears have leaned on the criticism that global breadth was weak without upside participation from non-US Equities. At the same time, many of my colleagues in the bull camp have been making the argument that the secular bull market in the US over the past decade can't possibly end without European Equities finally breaking out of their multi-decade consolidations. It looks like they may have finally got their wish.

Either way you slice it, the recent strength and improvement in the technical outlook for European stocks is yet another feather in the hat for stock market bulls. It is too soon to tell whether this will mark the beginning of a period of outperformance by European Equities after lagging their US counterparts for so long. But I do know that many investors have chased performance and been sucked into the lure of home country bias during the recent historic bull run for US Equities. If you can relate to this, it’s likely prudent to lighten up on your US Equity exposure and get used to a world where America is no longer the only game in town.