A slowdown in China is also weighing on the German DAX as German exporters like BMW, Daimler and Volkswagen warn of slower sales in the world’s second biggest economyThis sales slowdown is likely to be exacerbated by the ripple effects from the recent VW “defeat device” scandal which could have significant repercussions for European growth prospects in Q4, as car buyers’ confidence in Germany’s biggest export is shaken. There have been positive signs with M&A activity at its best levels in years, as companies look to pursue growth opportunities by acquisition, as opposed to organically. This year alone we’ve heard announcements from Shell/BG Group, EE/BT Group, Ladbrokes/Coral, Betfair/Paddy Power and chatter surrounding ABInbev and SABMiller. Despite all this feverish activity equity markets continue to struggle to push higher. With a number of technical indicators turning negative we’ve seen benchmark stock markets post what in technical analysis parlance are known as significant bearish signals. In recent weeks we’ve heard a number of rather melodramatic terms such as “death crosses”, which is where the 50-day MA crosses below the 200-day MA. If these had happened on a single index we probably wouldn’t be too concerned about them, but seeing them replicated across a number of different markets is cause for concern. We’ve seen them on the FTSE100, German DAX, Spain’s IBEX35, Eurostoxx50 and the EuroStoxx600, despite the fact that we still have another year of European QE to go. This weakness makes it much more difficult to identify pockets of opportunity, given that sector underperformance or outperformance can mask decent trading opportunities. A good stock in a declining sector will tend to get dragged down and underperform, while a bad stock in a good sector will tend to underperform but do better than the former. The trick is to find these underperformers in the declining sectors and avoid them in the outperforming sectors. When we get a reversal these stocks will probably see the biggest reaction. While commodity stocks have underperformed, house-building stocks have gone on a tear, with the contrast between Glencore – down 64% year on year – and Taylor Wimpey – up 77% – showing how different fortunes can be on an index that is currently struggling to stay in positive territory year to date.
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