The chart above shows that whilst the US has been merrily sailing along towards its all time highs during the last 10 days, that Europe (as measured by the Eurostoxx index) has been dancing to a different drum beat (ex UK until yesterday). The rising Euro (which has come back around 2c from Fridays post non farm’s peak), renewed unrest in Europe and in Spain in particular with the opposition Socialist party calling on the country’s Prime Minister Mariano Rajoy to resign amid a damaging corruption scandal have all weighed on equities.
The Nikkei also put in a reversal formation overnight – and on the highest volume for 23 months, hovering just over the key 11000 level. Rising bond yields are adding to the nervous tone and in fact, the “great rotation” that many commentators are suggesting will push indices higher may indeed be a fallacy, as of course rising bond yields reduce one of the key valuation pillars for equities. Those old enough to remember will recall the last time bond yields rose sharply – 1994 and this was a difficult year for equity markets with stock markets falling near 20%. It’s hard to have “one’s cake and eat it” if there is no real earnings growth.
One interesting opportunity should the MIB or IBEX fall further in the next few days as we approach the ECB meeting is that there could in fact be a pairs trade opportunity (we first suggested this last summer on the IBEX v the S&P 500 and which has been a massive outperformer) against the S&P 500 – to buy the European index and sell the S&P 500.
So, is it 2011/12 all over again or is any further snapback our cue to get long for the final blow off to new highs? Read the guide below which breaks down historic bull runs into duration and return in looking for clues as to when the current one could end. We also come to a measured and informed conclusion as to where a retracement is likely to end.