Stock markets around the world are rallying quite nicely on Monday as Hurricane Irma did not cause as much damage as previously feared, and North Korea did not launch another missile over the weekend.
The global rally seen Monday morning has also taken European stocks up to some key technical levels. This allows us to reiterate an issue I have focused on in the past, which is, quite simply: the European stock markets are at a key juncture. How they move over the next few weeks could and should be important to their performance toward the end of the third quarter and into the last quarter of the year.
This year, the “long Europe” theme and trade has been very, very popular (and crowded). It was working quite nicely this past spring. Back in May, for example, the Stoxx Europe 600 Index was up 10 percent on the year, while the S&P 500 was up “only” 7 percent in that time.
However, after a three-month sell-off, the Stoxx — and in the all-important German DAX index —
are now underperforming the S&P 500, and that doesn’t take into account currency issues.
These European indexes are still up on a year-to-date basis, so this is not a disastrous turn of events, but their technical pictures have given us some well-defined levels to watch over the coming days and weeks. Monday’s rally in the Stoxx has taken it above its 200-day moving average and right up to its trend line from May, as well as its 50-day moving average.
Therefore, if it can rally further from here, and break meaningfully above technical resistance, it should be quite positive for European equities. Furthermore, they could then play catch-up with U.S. stocks.
If, however, European stocks roll back over from these resistance levels, and take out their August lows (and take the Stoxx and the DAX below their 200-day moving averages) in any significant way, it’s going to be quite negative for the stock market on the other side of the pond.
All in all, the rally in European stocks since late August has helped them work off their oversold condition that had built up after a three-month decline. The action over the next couple of weeks will be important because it will tell us whether the recent bounce has legs … or if it was just a dead cat bounce that worked off its near-term oversold condition.
Commentary: European stocks are now at a key juncture