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Are The Problems in Europe Just Beginning? European Stocks Opportunities

Stock-Markets / European Stock Markets Dec 01, 2010 - 09:55 AM GMT

By: Jim_Farrish

Stock-Markets

Best Financial Markets Analysis ArticleThe fear of another financial crisis in Europe is impacting the markets around the world. The decline in the euro has been significant enough to rekindle speculation of the euros demise. Portugal’s bond auction of 12 monthTreasury bonds saw a significant rise in cost with the yield hitting 5.28% versus the 4.8% in early November. Spain has seen a rise in yields as well with rumors growing concerning financial trouble. It is the uncertainty of the current issues facing Europe that are driving the markets lower. One thing is for sure, a lack of clarity breeds speculation which left unchecked will feed on itself causing extreme market volatility.


Below is a chart of iShares S&P Europe 350 ETF (IEV). You can see since hitting the high on November 4th it has accelerated to the downside as the issues with Ireland began. Even with the bailout announced over the weekend the drop has continued on further speculation in relationship to Portugal and Spain. As stated above, when these uncertainties are left unchecked they feed on themselves through speculation.

It is important to note the break of support at $37.20 along with the move below the uptrend line near $36.70. Technically this is very negative for the index. The primary focus now would be finding support for the opportunity to regroup and determine the future trend. The $36.10 level may offer some interimsupport as the index catches it’s proverbial breath. However, I am not inclined to believe this is a buying opportunity if it does find short term support. The uncertainty pertaining to the future credit issues are still alive and well. This started with the discussions in April pertaining to Greece. That resulted in a bailout and the same with Ireland as those discussions surfaced again in October. There are too many other opportunities in the global markets versus investing in Europe. The risk is high and the opportunity is minimal at this point.

The impact of the news on Spain can be seen in the chart below of the iShares MSCI Spain Index ETF (EWP). There has been a distinct downtrend in place since the fall of 2007 and the recent events keeps the trend firmly in place. The economy has gradually deteriorated as well. Unemployment is now approaching 20% and GDP (gross domestic product) has been cut in half. This again is a country to avoid, attempting to catch a falling knife is a losing proposition.

Countries in Europe that don’t currently have issues relative to sovereign debt have been impacted by the fall in the euro. The charts below of iShares MSCI Germany Index ETF (EWG) and ishares MSCI France Index ETF (EWQ) show the downside moves since the Ireland issues began. The ripple effect of sovereign debt crisis is in play and no one in Europe is safe at this point. Scanning the all the member nations of the EU shows the drop since November to have hit each country to some degree. Even the best countries have lost ground with Sweden (EWD) and Austria (EWO) down just over 7% since November 4th.

Where is the opportunity, if any, in Europe? The short side has been the obvious winner to the point (EPV). The general response is to state this situation is oversold and there is likely to be a bounce off support. While true, the risk of such a trade is high. Watch the euro (FXE) for some insight to the confidence of the investor. A bounce off support for the currency would be the beginning of building a watch list for potential opportunities. Add all the countries who are members of the EU and scan them looking for the best opportunities avoiding the troubled countries such as Spain, Portugal and Italy. Have a disciplined approach and define your risk by establishing an entry, stop and target on any investment. As stated earlier the opportunities are in other areas of the globe versus forcing investments in Europe.

Jim Farrish is the Founder and Editor of SectorExchange.com and TheETFexchange.com.  His primary goal is to educate people about investing.  He has taught workshops locally and nationally for over 25 years, teaching thousands of individuals, business owners, and advisors how to focus on achieving financial independence.  Jim Farrish is the CEO of Money Strategies, Inc., a Registered Investment Adviser with the SEC. The company and/or its clients may hold positions in the ETFs, mutual funds and/or index funds mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. Investors who are interested in money management services may visit the Money Strategies, Inc., web site.

© 2010 Copyright  Jim Farrish


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