Will European QE Send Stocks Soaring?

It’s not that we need a chart to show that QE pumps up Wall Street, but here is one anyway.

The obvious question is whether Europeans QE will do the same for European stocks as U.S. QE did for U.S. stocks.

Liquidity drives the markets, so the logically answer is ‘yes’.

However, there are a few other variables.

  • U.S. QE was unleashed when the S&P 500 was near 12-year low. European QE was announced when German and English bourses are at or near all-time highs.
  • The situation in Europe is more fragmented and complex than in the U.S.
  • The U.S. dollar was at a multi-year high when U.S. QE was launched. The euro is at a 11-year low.

Despite all the differences, European QE was received similar to U.S. QE. Here’s what one German politician said:

“QE makes the rich even richer. It is a drug for the stock market. It drives up stocks. But the money should flow in the real economy, not banks.” Sounds familiar, doesn’t it.

Here are a few headlines commenting on the ECB’s move:

  • MarketWatch: Why European QE is bearish for US stocks
  • Fortune: Larry Summers: The ECB’s QE won’t work
  • FoxNews: Five reasons why ECB won’t save continents dying economies

U.S. stocks rallied for years despite all the persistent haters (me being one of them).

The stage seems set for a European stock rally.

However, the Vanguard FTSE Europe ETF (NYSEArca: VGK) cautions buyers against rushing in. VKG is about to the reach double technical resistance.

This doesn’t mean it can’t go higher, but buying before a speed bump is rarely prudent. A breakout would be a better reason to buy (and it would offer a good stop-loss level). The charts for five other European ETFs look similar. View Top 5 European ETFs here

What about the regions strongest stock index? Germany’s DAX is trading at all-time highs, and is about 3% above important support at 10,000. Further gains are possible, but a close below 10,000 would put the QE rally on hold.

Unfortunately there’s no ETF that closely tracks the German DAX. The iShares MSCI Germany ETF (NYSEArca: EWG) is severely lagging behind the DAX. Otherwise it would be interesting to buy EWG and short SPY (S&P 500 SPDR) or go long the DAX with a stop-loss just below 10,000.

The U.S. QE experiment has taught us that it’s foolish to bet against the Federal Reserve or its international counter parts … and yet I have a tough time believing that European stocks will take off right away.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

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What are the Best Europe ETFs?

Will the European Central Bank’s QE lift European stocks? This question deserves its own article, which can be found here: Will European QE Send Stocks Soaring?

Here is a look at the top five (+1) Europe ETFs:

Top 5 Europe ETFs:

  • Vanguard FTSE Europe ETF (NYSEArca: VGK) – 0.12%
  • iShares MSCI EMU ETF (NYSEArca: EZU) – 0.48%
  • WisdomTree Europe Hedged Equity ETF (NYSEArca: HEDJ) – 0.58&
  • SPDR Euro STOXX 50 ETF (NYSEArca: FEZ) – 0.29%
  • iShares Europe ETF (NYSEArca: IEV) – 0.60%

ETFs are known for being inexpensive (expense ratios are listed behind the ticker), but there are factors more important than the expense ratio.

For example, the Vanguard FTSE Europe ETF and the iShares Europe ETF have a 15% exposure to Switzerland. The remaining three ETFs have virtually none.

We can’t talk about Europe ETFs and ignore the Swiss National Bank’s (SNB) massive currency move. Abandoning the 1.20 EURCHF floor caused a 15% drop in the SIX Swiss Stock Exchange.

Whether the Europe ETF of your choice includes Swiss stocks or not can make a difference going forward. I’m not necessarily advocating one over the other, but investors should be aware.

The WisdomTree Europe Hedge Fund ETF is designed to provide exposure to European equities, while at the same time neutralizing currency fluctuation.

When the euro is weak, the WisdomTree Europe Hedge Fund ETF will beat an un-hedged European equity fund, but when the euro is strong, it will underperform an un-hedged European equity fund.

I happen to believe that the euro will stage a surprising rally in the weeks/months ahead, which – if the case – will render the WisdomTree Europe Hedge Fund ETF ineffective. More detail: The Biggest Trap of European QE

A blend of the Vanguard FTSE Europe ETF and SPDR Euro STOXX 50 ETF seems like a good combination for anyone looking to own European stocks. Is now the time to own European stocks? A detailed analysis can be found here: Will Eurozone QE Send Stocks Higher?

What About Germany?

How about just buying the European leader, German stocks?

There are a number of Germany ETFs, but none of them tracks the Deutscher Aktien Index (DAX) well.

The iShares MSCI Germany ETF (NYSEArca: EWG), the biggest and most popular Germany ETF, owns 59 stocks and claims targeted access to 85% of the German stock market. However, it has a correlation of only 0.59 (on a scale from +1 to -1), and is trading 25% below its all time high, while the DAX is at an all-time high.

If there was a great Germany ETF, it might make sense to go long German stocks and short U.S. stocks (pair trade: buy EWG, sell SPY).

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

German Central Bank Warns of Severe Correction

Germans are conservative and central bankers are by nature careful about their choice of words. So we should take note when German Central Banks sound an alarm about a severe correction, right? Maybe not completely.

“Central Bank Sounds Alarm” said the front page of a German financial newspaper.

The article continues (translated from German into English): “Central bankers choose their words carefully. Central bankers avoid dramatizations or exaggerations. Danger is at hand when the good old German Central Bank (Bundesbank) warns of severe real estate losses caused by price corrections.”

According to calculations by the German Central Bank, home prices in some metropolitan areas (such as Munich, Duesseldorf, Hamburg and Berlin) are up to 20% overvalued.

“The rapid price increase is not justified,” says the German Central Bank. But, “despite of an overheated market, the Central Bank does not expect a real estate bubble like seen in the USA.”

According to the newspaper (Handelsblatt) only a small portion of German real estate is financed. Real estate loans grew only moderately since 2010, currently at euro 1.1 trillion.

Measured by size, Germany is a small country, but it’s been the engine that kept European markets (NYSEArca: VGK) going. Germany’s economy also has a notable effect on international markets represented by the iShares MSCI EAFE ETF (NYSEArca: EFA).

Not Like Las Vegas

Germany is not like Las Vegas, what happens in Germany doesn’t stay in Germany (NYSEArca: EWG).

The chart below – which plots the German DAX against the S&P 500 (SNP: ^GSPC) – shows a close correlation between the DAX and S&P 500 (NYSEArca: SPY).

Germany isn’t an island, and if Germany gets into trouble, it will ‘export’ its problems along with Porsches and BMWs.

In fact, adding a few simple trend lines to the above DAX chart shows that the DAX has arrived at a crucial inflection point. Click here to see the chart with trend lines: Germany’s DAX Index Defined by Two Lines

Is Central Bank Alarm Bullish?

Perhaps the German Central Bank has ripped a page out of the Federal Reserve’s book.

It’s not common knowledge, but two recent Federal Reserve studies basically warned of a market crash and said it won’t be caused by QE. Click here for a quick and insightful summary of the bizarre studies: Federal Reserve Study

One thing is for sure, the persistent supply or ‘market crash alerts’ has provided the ‘wall of worry’ needed for stocks to climb higher. There is actual evidence for this.

To read why ‘false’ warnings and political chaos have provided the perfect environment for stocks, click here: Is the Mix of QE and Political Chaos the Perfect Environment for Stocks?

Simon Maierhofer is the publisher of the Profit Radar Report.

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Germany’s Stock Market Defined by Two Simple but Powerful Lines

Germany’s 30-stock blue chip index – the DAX – is trading at an all-time high. At the same time the DAX is butting against a 55-month ‘invisible fence.’ Can the DAX ‘jump the fence’ and break free?

The DAX – Germany’s blue chip index – is trading at an all-time high. Like the Dow Jones (DJI: ^DJI), the DAX is made up of 30 blue chip stocks, and many of them are firing on all cylinders.

Unlike most U.S. equity indexes, the DAX is a total return index. The final index number therefore includes dividends ‘reinvested’ into the index. The S&P 500 (NYSEArca: SPY) and Russell 1000 (NYSEArca: IWM) are market-weighted indexes.

There is no U.S. traded DAX ETF, but the iShares MSCI Germany ETF (NYSEArca: EWG) represents a basket of 54 stocks.

Regardless of the index methodology, the DAX is at a major long-term inflection point.

This is illustrated well by the chart below.

Since 2009 the DAX has been traveling higher in a broad trend channel. This week it reached the upper end of the trend channel, which serves as natural resistance.

As long as prices stay below resistance, there is an increased chance for a correction. A move above resistance would be bullish (as long as prices stay above).

Obviously, the DAX is important for German and European markets. German stocks also have a prominent weighting in the international MSCI EAFE ETF (NYSEArca: EFA).

Perhaps more importantly, foreign investors own 55% of the DAX, with U.S. investors making up a big chunk (related article: U.S. Investors Own XX% of Germany).

Also of interest, the German Central Bank just warned of a severe market correction.

We know that Germans are reserved people and central bankers choose their words wisely, so how serious is such a warning?

A quick but insightful take on the German Central Bank Warning can be found here:

German Central Bank Warns of Severe Correction

Simon Maierhofer is the publisher of the Profit Radar Report.

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Most Deceptive Index in the World Hits ‘All-time High’

When you see an index hit all-time highs you assume that most of its component stocks also trade near their high watermark, but that’s not the case here. The German blue chip index high watermark is inflated by 47%.

Not everything that shines is gold and not every index at new highs is really at new highs.

Germany’s 30-stock blue chip index – the Dax – is trading at all-time highs and is considered the driving force behind Europe’s bounce back.

However, the picture is not as rosy as it looks (in fact it’s much less rosy).

Everyday the Dax is bouncing from one new high to the next, but bellwether stocks like Siemes, SAP and Munich Re are trading well below their all-time high.

Siemens trades 30% below its peak reading, SAP 22% and Munich Re 60%.

How can that be?

The Dax – as quoted by the media – is a total return index, which means that dividends are added to the index. It’s automatically assumed that dividends are reinvested into the index, but dividends don’t increase share prices.

The Dax’s total return approach is unique. The Euro Stoxx 50 (NYSEAra: FEX), Dow Jones, S&P 500, Nasdaq, or Russell 2000 all do not ‘reinvest’ dividends into the index.

What’s the difference?

The chart above illustrates the difference between the Dax Performance Index (including dividends) and the Dax Kurs Index (excluding dividends).

The Dax Performance Index trades 47% higher than the ex-dividend index.

You may think what happens across the pond doesn’t affect you, but US investors own a huge chunk of the Dax. In fact, one single US investment company owns 6% of the Dax and all US investors own much more.

Exactly how much money US investors have parked in ‘made in Germany’ is discussed here: US Investors Own xx% of Germany

Simon Maierhofer is the publisher of the Profit Radar Report.

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US Investors Own 20 Percent of Germany

Germany is considered the economic locomotive of Europe. The Dax – Germany’s blue chip index – is skipping from one high to the next. This benefits US investors, which own 1 of every 5 Dax shares. One company alone owns 6%.

Foreign investors seem to appreciate ‘made in Germany.’

In the year 2000 foreign investors owned 30% of the Dax, which is the German counterpart to the Dow Jones (DJI: ^DJI). Like the Dow (NYSEArca: DIA), the Dax is made up of 30 (German) blue chip stocks.

Today foreign investors own 55% of the Dax.

For example, 3 of 4 Adidas shareholders are not from Germany. The same is true for re-insurer Munich Re. 54% of foreign investors own shares of the Deutsche Bank (translation: German Bank).

Foreign shareholders own the majority stake of 20 out of the 30 Dax components – there is no Dax ETF, but the iShares MSCI Germany ETF (NYSEArca: EWG) provides exposure to the German stock market.

One of the reasons investors around the globe favor German stocks is rising stock prices (although this is deceptive, see below).

The Dax gained 17% in the past year, which translates into $192 billion of new wealth. Ironically, that’s less than the S&P 500.  The S&P 500 ETF (NYSEArca: SPY) trades 21% higher compared to a year ago.

Still, most of the money flowing into the Dax comes from the United States. US investors own 20% of Dax shares.

Blackrock alone owns 6% of Germany’s Dax. Chinese investors own only 3% of the Dax. No doubt, the Dax gains are good news for US investors.

Unfortunately, the Dax is perhaps the most deceptive index in the world, and the ‘real Dax’ is actually only worth half as much as the Dax on steroids. How can that be? The full story can be found here: The Most Deceptive Index in the World Hits ‘All-time High’

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @ iSPYETF


World is Now Richer Than Ever Before

Thanks to the phantom economic recovery, mainly noticed by rising share prices in stock exchanges around the world, aggregate global wealth has risen to a new staggering high … but Draghi finds a fly in the ointment.

Based on Allianz’s Global Wealth Report, global shareholders are richer than ever before.

The Global Wealth Report tracks global funds held in stocks of every country – like the S&P 500 (NYSEArca: SPY), Dow Jones (NYSEArca: DIA), internationally developed markets (NYSEArca: EFA) and emerging markets (NYSEArca: EEM) – cash and cash equivalent bank deposits, stocks and consumer funds at insurance companies.

Assets like real estate (NYSEArca: IYR), cars, and art are not included in the report.

The wealth of investors around the world reached a total of $150 trillion.

You’d think that’s good news, but Mario Draghi – Europe’s central bank president – found a fly in the ointment. It has to do with banks. In fact, Draghi is alarmed.

Here’s the full story: Europe’s ECB Warden is Alarmed … For the Wrong Reason.

Simon Maierhofer is the publisher of the Profit Radar Report.

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Weekly ETF SPY: China ETF At Support – Buying Opportunity?

After breaking out, the FXI China ETF has consolidated and come back to test support. Is FXI’s return to support a buying opportunity or a warning sign? Technical indicators suggest an ultimately bullish solution.

China has been an ongoing theme here at iSPYETF.com. The October 11, 2012 article  “Contrarian Investment Idea: China ETF Looks so Bad, is it a Buy?” recommended to buy iShares FTSE China 25 ETF (FXI) with a breakout above 36.50.

Since then FXI rallied as much as 15% and just recently pulled back to test trend line support (see first chart).

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Over the long-term, Chinese stocks have a lot more up side potential and buy-and hold investors might be better off simply holding on to a long China position.

If you are interested in short-term profit management, the bold green trend line is of interest. This trend line has acted as support since September 2011. FXI’s up trend is alive and well as long as prices remain above it.

However, the trend line is ascending at a trajectory steep enough to validate an eventual break below. Additional support is provided by the horizontal green line around 38.

The second chart provides common Fibonacci retracement levels and additional longer-term support resistance levels. Based on Fibonacci’s wisdom, 39.92 is a support/resistance level to be watched as well.

Bottom line, as long as prices remain above 38 +/- the trend for FXI is up.

Is Japan’s Nikkei Rally for Real?

For four years the Nikkei’s performance has been flat as a pancake, but recent price action suggests that the time of boredom is over. A technical breakout looks to support the agenda of Japan’s new Prime Minister and higher prices for the Japan ETF.

Look at Japan and you see decades of economic contraction, which triggered dozens of financial stimulus packages. The new Prime Minister Shinzo Abe has vowed to continue the legacy of money printing.

Shinzo Abe announced Friday a $225 billion package of public works and other projects just after the Japanese government approved yet another emergency stimulus plan worth $116 billion.

Japan’s government debt is now about 230% of GDP.

Such fire hose financial dousing failed to buoy the Nikkei in the past, but this time might be different. Why?

Shinzo Abe has bullish technicals on his side, at least for now.

The Nikkei 225 just broke above multi-month trend line resistance and out of a multi-month trend channel (log scale, second chart).

As long as the Nikkei remains above trend line or channel resistance (now support), Japanese stocks will likely rally to their next resistance level. Where’s that?

The first chart pegs red trend line resistance around 11,800, about 9% above current trade.

The log scale chart (second chart) shows the same trend line around 14,000, about 30% above current trade.

A move above trend line resistance around 11,800 is needed to unlock the much higher target around 14,000.

Obviously, there will be pullbacks along the way, but the trend for the next few months looks to be up.

ETFs with exposure to Japan (Japan ETFs) include the iShares MSCI Japan ETF (EWJ) and Ultra MSCI Japan ProShares (EZJ), a double leveraged long ETF.

Contrarian Investment Idea: China ETF Looks so Bad, is it a Buy?

Just a couple of years ago China was considered the world’s growth engine, but not anymore. Pretty much every piece of news related to China’s economy is negative and Chinese stocks are close to their 2008 low. Is this a contrarian investment opportunity?

A few days ago, a reporter from Investor’s Business Daily asked me to write about an international investment opportunity. I focused predominantly on the action of the S&P 500, Nasdaq-100, Dow Jones, gold, silver, euro, and 30-year Treasuries, so it took a bit of research to come up with an international trade set up.

The opportunity that stood out most is a highly contrarian one and won’t win you a popularity contest at your next cocktail party: China.

Barron’s July 2, front cover categorized the Chinese economy and stock market as a “falling star.”

Printed in bold black font on the same front cover is this warning: “The Chinese economy is slowing and is likely to slow a lot more. Get ready for a hard landing.”

The Contrarian Opportunity

Contrarian investors know that forecasts of “hard landings” often turn into some of the best buying opportunities (remember how everyone felt about U.S. stocks just a few months ago). Contrarian investing means going against the crowd and requires nerves of steel and often patience, but even technical indicators suggest that a buying opportunity in China is approaching.

The Shanghai Composite Index is only about 15% above its 2008 low (@ 1,679) and currently sits atop important support, right around 2000. Unfortunately, U.S. investors can’t invest directly in the Shanghai Composite Index, but don’t worry, there’s an ETF for that.

The iShares FTSE China 25 Index Fund ETF (FXI) provides exposure to the 25 largest and most liquid Chinese companies. FXI seems to be forming a giant 5-year triangle with well-defined support and resistance.

How to Trade FXI

A break out in Q4 2012 is quite possible. Key support is currently at 31.70 and rising. Key resistance is currently at 36.30 and falling. The key support level lets you know exactly if and when you’re wrong (a break below 31.70) and makes this trade attractive from a risk management perspective.

There are two ways to trade this constellation:

1) Buy on weakness and as close to 31.50 as possible with a stop-loss just below 31.50 (more aggressive option).

2) Buy once prices break above 36.50 with a stop-loss just below 36.50 (more conservative option).

Hopefully, by the time the next cocktail party rolls around it’ll be more fashionable to talk about Chinese investments and how you got in before anyone else did.
Simon Maierhofer shares his market analysis and points out high probability, low risk buy/sell recommendations via the Profit Radar Report. Click here for a free trial to Simon’s Profit Radar Report.