In this short relative analysis insight we would like to focus on the reasons, which we believe will determine further European stock market under-performance relative to the U.S. stock market.
What strikes us in this chart is the fact that since the 2008 Credit Crunch the European stock market has been in a permanent bear market relative to the U.S. stocks.
The $VGK (Vanguard FTSE Europe ETF) vs. $SPY (SPDR S&P 500 ETF) ratio is currently trading at the level of 0.23 and is steeply approaching its lower negative trend support, not to mention it’s been trading well below its 200 days moving average which is a strong bearish indication (as a reminder please note, when the ratio goes up it means Europe outperforms the U.S. stock market, while when the ratio goes down it means Europe underperforms the U.S. stocks).
We firmly believe long-term asset allocators and trend-following investors should remain Europe underweight in their portfolios while long-term pair traders should keep Europe short and the U.S. stocks long.
Unfortunately, if we look from the short-term perspective, technical indicators are not willing to draw a better picture. Here is the chart of the $VGK vs. $SPY ratio covering the period of the past 12 months.
Here are our observations:
1. The ratio has been continuously trading in the negative trend channel (NTC) since June 2015! That is confirmed by the NTC and the true strength index (TSI) which has been below zero since June 2015 apart from a couple of days in August 2015. In order to easier identify the mentioned period of time, we have put a grey vertical line commencing the negative trend.
2. The 14 days Relative Strength Index – RSI (14) – has recently started steeply going down and currently is trading at the level of 35.69 (investors should bear in mind that the levels of the RSI parameter below 30 indicate the oversold territory).
3. The ratio has recently started trading at the level of the lower Bollinger Band which in the very short term may indicate a short-lived bounce. Generally we take it as a bearish signal.
4. The current ratio level of 0.2341 is trading very far away from its 200 days moving average which at the moment equals to 0.2518 (the difference of 7%!).
5. The MACD and TSI indicators have just switched into a negative momentum mode which only strengthens the case of further Europe underperformance in relations to the U.S. stock market.
Having looked at Europe relative to the U.S. stock market from both long-term and short-term perspectives, we can’t see any reasons in favor of the European stocks. Therefore, we believe that in the long-term perspective:
1. Asset allocators should underweight Europe in their portfolios.
2. Trend followers should avoid Europe in favor of cash positions.
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