fter a 6 year bull market equity markets in Europe have started to show signs of exhaustion with the FTSE100 in particular finding upside progress difficult. Having put in a new record high above 7,100 in mid-April the index, along with other European markets, has started to show signs of tiredness as financial markets look towards the US central bank for opportunities to tighten policy in a world that is increasingly showing symptoms of declining price pressures and slowing growth.
As we come to the end of Q3 the FTSE100 is currently struggling to stay in positive territory for the year, which doesn’t bode well for a positive finish to Q4.
Source: CMC Markets September 2015
The biggest drag on the UK benchmark over the past twelve months has, not surprisingly, been the basic resource sector. as the decline in commodity prices has decimated profit margins across the industry with mining and oil and gas stocks bearing the brunt of the recent weakness.
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 economy.
This sales slowdown is likely to be exacerbated by the ripple out effects from the recent VW “defeat device” scandal which could have significant repercussions for European growth prospects in Q4, as car buyer’s 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 seen a number of what are known in rather melodramatic terms 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 the fact we are seeing them replicated across a number of different markets is a cause for concern given that 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 that 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 as 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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