Europe Breakout On The Way, Or More Disappointment Coming?

Last week, we took a closer look at emerging markets (EM) and showed why, although the group has experienced a significant run-up year to date (MSCI Emerging Markets +23.35% as-of 7/14/2017), it could still be early in the game for EM. Today, we’ll take a closer look at Europe from a technical point of view.

First things first: Below is the long-term chart of the Euro STOXX 50 Index. Think of this index as the Dow Jones Industrial Average for Europe. As you can see, the Euro STOXX 50 found resistance right at a bearish trendline going back 17 years. Will it break out soon? There is a good chance, as many other global markets have recently broken out of similar trend lines, and the index could simply be following suit.

Per Ryan Detrick, Senior Market Strategist, “We’ve seen technical strength in Europe on several occasions before that turned out to be head fakes. Ideally, we need to see continued growth in corporate earnings and multiple quarters of solid economic data to be confident this rebound is real. Many investors might feel like they’ve ‘missed’ the European rally, but if it is real, we expect it to potentially last for years. And a breakout above this long-term bearish trendline would be a great start to a potential long-term bullish trend.”

Last, we have been impressed so far with President of France Emmanuel Macron, as he is saying all the right things. It is still early, but if Macron can execute on his key initiatives like labor reform and taxation, this could help spur another engine of growth for Europe. Germany and the Netherlands are currently providing most of the European growth, but if the third-largest economy in the region can start to improve, this would be another positive.

For more on Europe, be sure to read our Weekly Market Commentary due out later today, as we will take a closer look at the global earnings picture.

 

IMPORTANT DISCLOSURES

The economic forecasts set forth in the presentation may not develop as predicted.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.

Stock investing involves risk including loss of principal.

Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.

The EURO STOXX 50 Index is a blue-chip index for the Eurozone, which covers 50 stocks from 12 Eurozone countries: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain.

Dow Jones Industrial Average (DIJA) is the most widely used indicator of the overall condition of the stock market, a price-weighted average of 30 actively traded blue-chip stocks, primarily industrials. The 30 stocks are chosen by the editors of the Wall Street Journal. The Dow is computed using a price-weighted indexing system, rather than the more common market cap-weighted indexing system.

Technical Analysis is a methodology for evaluating securities based on statistics generated by market activity, such as past prices, volume and momentum, and is not intended to be used as the sole mechanism for trading decisions. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts and other tools to identify patterns and trends. Technical analysis carries inherent risk, chief amongst which is that past performance is not indicative of future results. Technical Analysis should be used in conjunction with Fundamental Analysis within the decision making process and shall include but not be limited to the following considerations: investment thesis, suitability, expected time horizon, and operational factors, such as trading costs.

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