A brief look at European Equity Markets: 07/07/2012
A brief look at European Equity Markets: 07/07/2012
European equity markets launched into a mega bear market roughly 7 years before the US equity markets. For instance CAC, the French index most widely followed, last topped out at 6927 back in August 2000 and has since made a series of lower tops. In contrast, the US equity markets began its current bearish phase in October 2007, a good seven years later. While the ebb and flow in world equity markets has a very high degree of correlation, they do not move in lockstep. Could European markets actually recover before the us equity markets? That appears a rather outlandish notion until you fully consider the crashing Euro against the $.
If the Euro were to crash to parity with the $ as some commentators are suggesting, could the EU markets rally because of cheapening of the currency?
To briefly see how EU markets are currently positioned I will take a brief look at the main indices one by one.
CAC: The French index peaked at 6927 in August end, 2000. After the peak, the index made a low of 2402 in November 2003, and then rallied along with the US equity markets to a high of 6182 in July 2007. Note the high was made before the peak in S&P 500, and the high was significantly lower than the high of 6927 in 2000.
From the high of 6182, the French index crashed along with the world equity markets to a low of 2552 in March 2009. The low of 2552 matched the low of 2402 in November 2003 but was higher. CAC rallied with the US markets from the low of March 2009 to a high of 4187 in February 2011 but the high was about 50% retracement of the previous fall. The rally was far weaker than the one in the US markets that nearly challenged the previous all time highs of 2007.
CAC has since been correcting. It crashed from 4187 to a low of 2810 in September 2011 and has since tested this low twice and made higher bottoms each time. Note the low in September 2011 was higher than the one in March 2009, which in turn was higher than the one in Match 2003. Can the CAC have made a bottom at 3023 in September 2011?
The case for such an interpretation is rather involved and I don’t wish to discuss my wave counts. Briefly then, CAC has traced out a major A-B-C corrective wave from 2000 to 2009 over nearly 8 years. Thereafter, it rallied from a low of 2595 in March 2009 to a high of 4187 in what could be construed as the first leg of a bullish Wave I. We are thus in Wave II of which the most destructive a part involved a retest of the bear market low of 2595. CAC made a low of 2693 on 23rd September followed by a higher low 2890 on 11th November, followed by a higher low of 3006 on 30th May. These series of higher low together with the wave count lead one to believe that CAC may have put in low of 2890 on 11th November 2011.
That doesn’t mean CAC is going to launch into a new bull markets any time soon. That depends on how the Wave II correction plays out and these are usually very subdued giving little hint of the explosive rallies to follow. The first tangible clue to the structure of the Wave II will come from a rally in CAC above 3500 in the next few weeks.
That said I am pretty confident that the low 2890 will not be taken out by any subsequent crashes.
DAX: In terms of wave structure, the DAX story in broad outline is much the same as that of CAC. The only major difference being the German economy is inherently more resilient than the French counterpart. Hence, the depth of corrections are relatively lower and recoveries correspondingly that much more robust.
DAX peaked out in March 2000 at 8095 and without much fuss crashed in a simple straightforward manner to a low of 2180 in March 2003. From there, DAX recovered along with the US equity markets peaking at 8095 in July 2007 once again without making a new high. Crashing from there in line with world markets, the index made a low of 3695 in March 2009. With that, the index completed a full A-B-C correction with the low of C being considerably higher than that of A.
From March 2009 level of 3695, DAX rallied to a high of 7552 in May 2011. It did not reach the previous two tops at 8095 but that is classic deception for Wave I of a bull move. The subsequent correction saw the index fall to 5032 from where it has rallied with two higher tops and bottoms. The first leg of Wave II correction may well be over at point 5912 on 6th June.
That doesn’t mean we are going to see a bull run in the DAX any time soon. Much will depend on how wave II unfolds. But the low of 5032 in September 2011 is likely a bottom that won’t be taken out again.
Let me be clear. DAX has still a long way to go as far as WAVE II correction is concerned. The C wave of Wave II can be quite destructive. But we are likely to have an upward bias in EU equity markets for the next 6 to 9 months that may look like a bull market albeit with very sharp corrections.
FTSE 100: The FTSE 100 story is much more like the DAX than the CAC. The wave structure following the high in December 1999 is much the same as that of DAX. Notice though that FTSE is not as strongly upward biased as DAX with low in March 2009 at 3512 not being all that much higher than the low of 3281 in March 2003. Likewise, FTSE did not equal the previous top of 2000 in 2007 although it came close. In all other respects, the wave count for FTSE is a replica of DAX.
From the low of 3512 in March 2009, FTSE rallied to a high of 6102 in February 2011. That to my mind completed the Wave I of a new bull move. The index corrected from there making a low of 4942 10th October 2011 and has since rallied and corrected again. For all practical purpose, the first leg of the Wave II was complete at 5382 on 8th June.
We could see an upward bias in FTSE with sharp corrections as the B leg of wave II unfolds. Again this is still a complex correction not a classic bull run. Much of the gains and more in the upward drifting in values in B leg and more are just wiped out in C that follows.
Spain Madrid General: Note the structure and correlations of the Spanish market are completely different from its continental cousins are more like those of the US market. If that appears strange, it is also true!
The Spanish market peaked at 1740 in November 2007 along with the US markets. It has been correcting since with no end in sight. Having made a low of 739 in March 2009, the index rallied to 1273 in June 2010 and then meandered down from there to low of 629 in May 2012. The correction is by no means complete and has room to run both in terms of price and time. That said, we might be into a Wave IV pullback currently though it is hard to see that reach above 780.
566 remains a possible target for wave V for the Spanish market.
It would appear from the foregoing that those economies in Europe that have export markets, will be able to take advantage of the falling Euro to export their way out of trouble. The others may continue to sink.
NB: These notes are just personal musings on the world market trends as a sort of reminder to me on what I thought of them at a particular point in time. They are not predictions and none should rely on them for any investment decisions.