The European Rally Lifts the Laggards

Flows into European stocks gathered momentum since the end of April, in a resurging trend that accelerated sharply in the first week of May, reflecting a new positive sentiment towards the European markets after that investors had run off in 2016 and now, in just one week, poured 2,5 billions into European equity funds. Many reasons explain this new positive sentiment, from the evaporation of political risk after the French vote, to an improved economic confidence after that the ECB president Mario Draghi expressed optimism about the region’s economic recovery, still keeping the actual monetary stimulus.

From a technical point of view, all this translates into fresh breakouts by the major indexes, a signal of trend continuation that extends the bullish wave that had been interrupted by the April’s consolidation phase. Sharp moves occurred among singles sectors. Those that had been recently stronger confirmed their robustness. It is the case of Chemicals, Construction, Industrial Goods, Technology, Household Products. Other are sharply weak since a couple of months and still their trend is negative, like Energy and Basic Resources.

We find interesting to observe the emerging strength of certain sectors that are struggling to re-establish their trending mood, in both absolute and relative terms. The index Stoxx Europe 600 Banks, for example, which chart is shown in Figure 1, has broken the horizontal line that is opposing resistance since the beginning of 2017 and confirmed a continuation pattern that anticipates further strength. The relative trend of this sector against the European market (Stoxx 600), visible in the lower window of the chart, is also re-establishing its trend that was interrupted the last December.

Figure 1: Stoxx Europe 600 Banks. Weekly data since 2015. The relative trend against the Stoxx 600 (lower window) is regaining direction while the sector index has broken the first quarter highs after completing a bullish continuation pattern.

Another interesting case is that of the Auto sector (Figure 2) which index has also broken on the upside a resistance which shape is similar to that of the banks, a horizontal line joining the first quarter’s highs. The rectangle that has formed is a typical continuation pattern, sustained by a series of progressively rising lows since July 2016. The relative strength in this case is struggling to establish a rising trend.

Figure 2: Stoxx Europe 600 Automobiles and Parts. Weekly data since 2015. The relative trend against the Stoxx 600 (lower window) struggles to re-establish a positive trend but a bullish pattern has formed by the rectangle limited by the first quarter’s highs which breakout has been confirmed last week.

A similar pattern, a bullish rectangle broken on the upside, is also visible for the Health care sector. In this case the potential of recovery is even bigger since the sector has been deeply underscored the market since many months. This is visible by the course of the relative trend against the Stoxx 600 (red line in the lower window of the chart in figure 3) that reflects, since July 2016, an attitude to underperform the market. An attempt to regain momentum is taking place, but not clear enough to call a relative strength signal.

Figure 3: Stoxx Europe 600 Health Care. Weekly data since 2015. The relative trend against the Stoxx 600 (lower window) is still weak since July 2016 but also in this case a bullish pattern has formed by a rectangle of continuation.

Alberto VIVANTI – SAMT Vice President – Graubünden and Liechtenstein Chapter– alberto.vivanti@samt-org.ch

Disclaimer: the above article is for general information and educational purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.