The annual financial summit in Jackson Hole, Wyoming concluded on Sunday, and one of the biggest stories out of the conference for central bankers were the words of European Central Bank President Mario Draghi. Essentially, Mr. Draghi said that European policy makers are ready to perform a stimulus package in Europe similar to the one the Fed has been running here in the United States.
That news could be significant for European stocks, and a new monetary policy could make for a big rebound and a profitable situation for us…
Given that the Fed has been performing some form of quantitative easing for the better part of the last five years, European stocks should benefit similarly should the ECB follow through. When you consider that the S&P has tripled since the low in March 2009, the Euro indices may not get the same type of a boost, but they should get a considerable lift if the monetary policy is adapted.
Ironically, when I ran my weekly bullish and bearish scans on Friday, there were four different exchange traded funds, or ETFs, that represent European indices that appeared on the bullish list. Those scans were run after the close on Friday and before the comments from President Draghi.
I chose to use the EMU Index iShares (NYSE: EZU) as a barometer for the overall European market. The ETF tracks the investment results of an index from those countries in the European Monetary Union. The countries include Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Portugal and Spain.
Looking at the chart of the EZU, we see that the ETF has not performed nearly as well over the last five years as the S&P has. The debt problems many members experienced in 2011 caused the EZU to dip rather sharply which certainly had an impact on the performance of the last five years.
You can see that the EZU formed a double bottom in late 2011 and early 2012 and then entered an upward sloped trend channel in late 2012. You can also see that European stocks have slipped over the last few months and that they reached the most oversold levels since 2012 before bouncing a little in recent weeks.
Looking at what happened after the two lows that created the bottom rail of the channel, when the fund hit those levels it rallied between 20-30% over the coming months. If it were to experience a similar rally this time around, it would mean that the fund would move up to the $46-$49 range between now and the end of the year.
