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[jlfmi]

Analyzing The Latest Euro Trends

Several key equity trendline tests are underway across the European region.

The past few editions of our #TrendlineWednesday feature on Twitter have not exactly been the most intriguing we’ve ever posted. In fact, it has been a challenge at times recently to even find enough candidates to publish the feature. This week, however, is a different story. Compelling trendline developments abound in the financial markets -- with no area sporting more critical trendline tests than the European equity markets. Here is a sample of some of those key tests underway.

The STOXX Europe 600 Index is testing its post-2009 Up trendline…again.

The German DAX is also testing its post-2009 Up trendline…again.

And the French CAC-40 is testing its post-Brexit Up trendline.

Each of these developments is worthy of its own dedicated blog post. The fact that we are observing coordinated trendline tests across those key markets tells us that this is potentially a key juncture. So is this another buying opportunity -- or have these markets worn out the support of their respective trendlines?

At The Lyons Share, we have been very consistent in our analysis and views toward Europe. In a Premium Post, we reiterate those views and provide an update, in light of the present developments. We also share which markets around the region that we favor -- and which ones we’d avoid.

If you’re interested in the “all-access” version of our charts and research, please check out our new site, The Lyons Share. You can follow our investment process and posture every day — including insights into what we’re looking to buy and sell and when. Thanks for reading!

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Disclaimer: JLFMI’s actual investment decisions are based on our proprietary models. The conclusions based on the study in this letter may or may not be consistent with JLFMI’s actual investment posture at any given time. Additionally, the commentary provided here is for informational purposes only and should not be taken as a recommendation to invest in any specific securities or according to any specific methodologies. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.

[jlfmi]

Euro-Stocks Trashed

European equity indices are testing key levels of bull market support.

The recent (ongoing?) equity correction has not merely been a U.S. event. Most stock markets around the globe have also suffered drawdowns in concert with the U.S., to varying degrees. Some have experienced mere “flesh wounds” while others have really taken it on the chin. Falling into the latter category would be European stocks, broadly speaking.

Most of the core European markets got hit every bit as hard, or harder, than the U.S. Perhaps the most discouraging thing, though, is that they have yet to rebound nearly as sharply as much of the U.S. market has. And, in fact, in the recent re-test/retracement, many core European markets actually dropped below the levels of their early February correction lows. On one index in particular, this re-test has brought it down to a potentially very key area.

As presented earlier in our #TrendlineWednesday feature on Twitter and StockTwits, the popular broad European index, the STOXX Europe 50, has now dropped down to where it is testing the Up trendline stemming from its March 2009 lows.

Some technical tests are obviously more important than others. While many of the major U.S. indices have tested various trendlines and other manners of support on a shorter-term basis, this test by the STOXX 50 is a bit more significant. This is a test of the integrity of its 9-year bull market. A failure here may well lead many technicians to trash some their European exposure.

On the other hand, this support level may be just what the doctor ordered for European equities which have had a rough start to their year. The trendline may serve as a rally springboard as it did at the early 2016 and Brexit lows. Although, even if it bounces, the region’s present under-performance may be cause for a relatively short-lived rally. Either way, the reaction of the STOXX 50 at this level certainly bears watching.

If you’re interested in the “all-access” version of our charts and research, please check out our new site, The Lyons Share. You can follow our investment process and posture every day — including our strategy for European equities as well as insights into what we’re looking to buy and sell and when. Thanks for reading!

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Disclaimer: JLFMI’s actual investment decisions are based on our proprietary models. The conclusions based on the study in this letter may or may not be consistent with JLFMI’s actual investment posture at any given time. Additionally, the commentary provided here is for informational purposes only and should not be taken as a recommendation to invest in any specific securities or according to any specific methodologies. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.

[jlfmi]

Key Line Saves French Stocks From Further Damage

France’s CAC-40 is testing the support of one of the financial markets’ most prolific trendlines.

As many readers are aware, we have a regular feature on Twitter and StockTwits each week called “#TrendlineWednesday”, featuring some of the most noteworthy current trendline developments in the financial markets. As we mentioned on Twitter the other day, there are some weeks when it takes considerable effort to find even a handful of trendline developments meeting the “noteworthy” criteria. Other weeks, there are so many noteworthy trendlines in play that several big ones can’t even make the cut. The latter situation would describe this week. And among the abundance of interesting examples is perhaps the most prolific trendline in all of the financial markets currently being tested: a long-term Down trendline on France’s CAC-40 stock index.

The trendline at hand stems from the CAC-40′s all-time high in 2000 and connects (on a linear scale) the peaks in 2007 and 2015. Back in April, at the time of the presidential elections in France, the CAC-40 found itself again testing the 17-year Down trendline. Following the elections, the CAC-40 finally hurdled the long-term trendline -- and in dramatic fashion, gapping up by more than 4%.

After brief follow-through into early May, the CAC-40 began a long, steady descent back toward the breakout level of the trendline. As markets and securities tend to do, eventually, the CAC-40 filled the April 24 gap a couple weeks ago. All that was really left was to test the broken trendline, presently intersecting near the 4995 level. On Tuesday, amid the North Korea-inspired market jitters, the CAC-40 finally did test the trendline again, making a low of 4995.07 before immediately bouncing.

Presently, the CAC-40 is trading at 5135, up nearly 3% in a straight line off of its trendline test. For those who still think this type of analysis is some kind of voodoo, the odds of a random precise reaction off of a 17-year trendline like this would be astronomical. We’re happy to have them continue to think these kinds of events are random and that markets are efficient and all that stuff. That’s what gives the rest of us an edge.

So what’s next for the CAC-40? Naturally, as long as the trendline, i.e., former resistance, continues to act as support, expect the CAC-40 to continue its bounce. Beyond that, in a premium post at The Lyons Share, we lay out our specific strategy for taking advantage of this opportunity, including the key levels to watch on the upside and the downside.

If you’re interested in the “all-access” version of our charts and research, we invite you to check out our new site, The Lyons Share, where we are currently running our PRE-“FALL” SALE. The SALE ends September 4 so considering the discounted cost and a potentially treacherous market climate, there has never been a better time to reap the benefits of our risk-managed approach. Thanks for reading!

Photo is of part of The Maginot Line, a line of fortifications, obstacles, and weapon installations built by France in the 1930s to deter invasion by Germany.

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Disclaimer: JLFMI’s actual investment decisions are based on our proprietary models. The conclusions based on the study in this letter may or may not be consistent with JLFMI’s actual investment posture at any given time. Additionally, the commentary provided here is for informational purposes only and should not be taken as a recommendation to invest in any specific securities or according to any specific methodologies. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.

[jlfmi]

Transatlantic Traders Breathe Unprecedented Sigh Of Relief

Stock volatility expectations dropped by a record amount following the French election -- in both the U.S. and in Europe.

As with prior geopolitical events over the past 12 months, equity volatility expectations really ramped up prior to last weekend’s election in France. Similar to the Brexit episode and the U.S. presidential election, traders were falling all over each other to add protection in the form of volatility hedges. Like those previous episodes, the stock market action hardly justified such a ramp in volatility expectations. In fact, as we detailed in a series on the VIX two weeks ago, the developments were, in a way, unprecedented given the relatively minor pullback in stocks. Nevertheless, traders apparently thought the election represented significant event risk.

As we saw with Brexit and the U.S. presidential election, though, the considerable volatility hedging necessarily lessened the event risk as it provided a substantial cushion to any potential post-event blow to the stock market. Such a cushion was demonstrated in the immediate aftermath of Brexit and the U.S. election as sharp losses were quickly erased. In this case, the hedges proved wholly unnecessary as global equity markets commenced an immediate a rally after the French election. As such, in a collective sigh of relief, the volatility hedges on both sides of the Atlantic were removed as quickly as they were built up. In some ways, this sigh of relief was also unprecedented. To wit:

In the U.S., Monday saw the largest daily decline (42%), on a percentage basis, in the 6-year history of the 9-day S&P 500 Volatility Index, or VXST.

Similarly, across the pond, the Volatility Index (VSTOXX) on the European STOXX 50 Index experienced the largest daily decline (35%) in its 12-year history.

The above charts display historical drops of similar magnitude in each of these instruments. However, as noted on the charts, there has been quite a variation in the conditions surrounding such drops, i.e., some occurred when the Volatility Indices were quite elevated and others when they were relatively low. At least historically, the prevailing conditions have made a difference in the forward returns in the S&P 500 and STOXX 50.

Our Premium Post on The Lyons Share examines how prevailing conditions have effected the impact of the Volatility plunge on returns in the S&P 500 and the STOXX 50 going forward – and by how much. The analysis may give us a better idea about which way stocks are likely to go following this recent signal. If you find the original research we share here interesting and helpful, we invite you to check out our “all-access” site, The Lyons Share.

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Disclaimer: JLFMI’s actual investment decisions are based on our proprietary models. The conclusions based on the study in this letter may or may not be consistent with JLFMI’s actual investment posture at any given time. Additionally, the commentary provided here is for informational purposes only and should not be taken as a recommendation to invest in any specific securities or according to any specific methodologies. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.

[jlfmi]

Have European Stocks Hit Their Speed Limit?

Long-term chart resistance may slow the pace of the European stock rally.

We have been noting of late the relative improvement among international equity markets. This even includes a recent pickup in the perpetual laggard, Europe. Now, there are several markets in Europe that, in our view, actually look very attractive, as members of The Lyons Share know. However, the broad European measures (that are heavily weighted toward core countries) have, for the most part, lagged for many years, if not decades. That has not been the case since December, however, as the continent has been on a solid run. That run may at least see the pace of its advance slow down here, though, based on the charts.

A couple weeks ago, we suggested that the rally in the Dow Jones Industrial Average (DJIA) may have “Reached Its Speed Limit”. Our reasoning was that the index was hitting the upper bound of its post-2009 rising trend channel. And while not a roadblock to further gains, we surmised that it may serve to limit the pace of advance. As it turns out, its progress has slowed in recent weeks as the DJIA has actually drifted lower since that post. We see a potentially similar limiter in the European stock rally as well.

From Fall 2011 through 2015, the Dow Jones STOXX Europe 600 Index was supported by a well-defined Up trendline, with no fewer than a half a dozen nearly-precise touches. These included October and November 2011, June 2012, October 2014 and August and September 2015. At the beginning of 2016, the trendline was finally broken. Subsequently, the former support began to serve as resistance, repelling prices in March and April 2016. One year later, the STOXX 600 has again returned to challenge the underside of this broken post-2011 Up trendline.

Will this trendline pump the brakes on the STOXX 600 rally as a similar line did for the DJIA? That remains to be seen. The rally in Europe still has some decent momentum behind it so it very well may continue its upward trajectory. However, again, the rally may see its speed limited by this trendline.

That is, of course, unless the index can accelerate its ascent and reclaim the top side of the trendline. In that case, the European rally may well be merging onto the Autobahn.

Like our charts and research? Get an All-Access pass to our complete macro market analysis, including tons of charts and ideas like this EVERY DAY, at our new site, The Lyons Share.

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Disclaimer: JLFMI’s actual investment decisions are based on our proprietary models. The conclusions based on the study in this letter may or may not be consistent with JLFMI’s actual investment posture at any given time. Additionally, the commentary provided here is for informational purposes only and should not be taken as a recommendation to invest in any specific securities or according to any specific methodologies. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.

[jlfmi]

French Stocks Encountering THE Piece De Resistance

The French CAC-40 is testing a prolific trendline stemming back nearly two decades.

As most of you know, we post a fair number of charts containing trendlines (we even have a feature on Twitter called #TrendlineWednesday). It’s not that trendlines are a main focus of ours. But they’re a simple technical tool to employ, and to understand.  That said, when utilized appropriately, trendlines can be much more effective than one might think, as today’s Chart Of The Day illustrates. 

Of all the trendlines currently being engaged in financial markets, the one shown below on the French CAC-40 Index may be the most prolific.  We have done other posts in the past pertaining to challenges to the index (utilizing the same corny Piece De Resistance headline), but this one takes the cake.  We’re referring to the Down trendline stemming from the CAC-40’s 2000 high and connecting the 2007 and 2015 highs.  Prices are presently very close to testing the trendline once again.

We actually covered the index’s test of the trendline back in 2015 – a test which obviously was successful upon examination of the present chart. Thus, this iteration of the trendline test still takes the cake.

Will the test be successful again and contain prices as it has for the past 17 years?  We don’t have the answer but this prolific of a trend line should not be underestimated.  However, given the relative momentum in stock markets across the European continent, this might be the CAC-40’s best chance yet at breaking this resistance.

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Painting is the Battle of Waterloo by William Holmes Sullivan.

Like our charts and research? Get an All-Access pass to our complete macro market analysis, every day, at our new site, The Lyons Share .

Disclaimer: JLFMI’s actual investment decisions are based on our proprietary models. The conclusions based on the study in this letter may or may not be consistent with JLFMI’s actual investment posture at any given time. Additionally, the commentary provided here is for informational purposes only and should not be taken as a recommendation to invest in any specific securities or according to any specific methodologies. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.

[jlfmi]

French Stocks Encountering A ‘Piece De Resistance’

France’s CAC-40 may find its pace of advance slowed by a former key line of support.

Among the many areas of the market that have responded positively following the U.S. presidential election has been the previous (and perpetual) laggard, Europe.  This has included ”winners” like markets from the northern part of the continent as well as members of the core, like Germany and France.  It is the French CAC-40 Index that makes our Chart Of The Day today.

Back at the end of July, we posted a chart noting that the CAC-40 was encountering potential resistance on its chart, namely the post-2015 Down trendline.  We suggested that, while the trendline should offer a stiff challenge, if the index was able to surmount the line, it could supply a nice pop for French stocks. Well, after a brief rejection, the CAC- 40 was indeed able to climb above the trendline.  However, the aforementioned “pop” was quite paltry as the CAC-40 would move straight sideways for the next four months.

Judging the action in the index since the trendline break, it is apparent that the horizontal resistance representing the pre-breakout highs of 2014 as well as the highs from March-April of last year (which signified the 50% retracement of the 2015 to 2016 decline) offered the more consequential resistance than the post-2015 Down trendline.  And it wasn’t until early December that prices were finally able to surmount that horizontal resistance.  In the month since, that CAC-40 rally has accelerated, along with the rest of Europe.

In the first few days of 2017, however, the index finds itself bumping up against a potential inhibitor to this newfound rapid rate of advance.  Specifically, but it is the underside of the post 2011 Up trendline.

This trendline stems from the lows in September 2011 and connects the (Draghi) low in the summer of 2012 as well as the lows in October and December 2014 and August-September 2015. The CAC-40 finally broke the trendline at the beginning of 2016. As the saying goes, support becomes resistance, and this was the case at those March-April 2016 highs. The recent acceleration has the index testing the bottom of that trendline once again.

This in no way is to suggest the rally in French stocks is over.  Indeed, there appears to be plenty of room to the upside in the CAC-40 and many other European bourses, should they be inclined to continue their ascent. However, given the potential resistance posed by the post-2011 Up trendline, the pace of the advance should be more contained than what we have witnessed over the past month. Of course, should the index convincingly break above the trendline, a more rapid rate of ascent is possible.  However, that would not be our prediction nor our playbook until such a breakout occurs.

In sum, this trendline may not exactly be a “Waterloo” for French stocks, however, it may serve as a governor on the pace of their advance.

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Painting is the Battle of Waterloo by William Holmes Sullivan.

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The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.