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Bearish outlook for European stocks

Cheap as chips as indices proliferate
November 1, 2018

I am reliably informed by the Index Industry Association (IIA) that in its realm there are now nearly 3.3m indices to play with. The World Bank says there are 43,192 publicly listed companies around the world – meaning that there are 70 times as many indices as there are individual shares to buy. Many blame the proliferation on exchange traded funds, derivatives and passive investing more generally. As index providers receive a fee from those who want to use them, there’s the first incentive; then there is name recognition and status. The IIA believes they are needed so that active asset managers can benchmark their performance.

Probably the most important one for Europe is the Stoxx Europe 600, a subset of the Stoxx Global 1800, covering 600 large, medium and small capitalisation companies across 17 countries and a total 90 per cent of the free float. British companies make up 27 per cent of the index, underlining the international importance of UK finance. Established eurozone countries make up a bigger chunk between them; the Czech Republic, Norway, Sweden and Switzerland also feature.

This month’s price action has been a sorry sight; a large black candle known as a Marabuzo, which broke long-term trendline support since 2009, and the neckline of a head-and-shoulders top. Fifty and 200-day moving averages had turned down with a death cross mid-August, and we have retraced half the rally since early 2016; we’re back to where we started in 2017. Even more alarming is that this index has been capped at the 400 area since the year 2000 and this is its fourth attempt at it. One wonders whether continental Europeans, for whom the cult of the equity is a relatively new phenomenon, will be tempted to throw in the towel. First measured targets from the height of the head are 335 and 315.

 

Drilling a little deeper, Paris’ CAC 40 index of top shares had a seriously bad October, a bearish engulfing candle covering (at the time of writing) the bodies of the candles of the past 18 months. Topping activity this year and last around 5500 is lower than 2007’s high (6168) and that of 2000 (6944), producing a series of secular lower highs. Moving averages only turned bearish this month, mind you, and the slightly irregular topping pattern has a first measured target at 4500.

 

Amsterdam’s AEX-index of the most active 25 shares is operated by Euronext, the pan-European exchange. Here, too, 50- and 200-day moving averages crossed to a sell this month with another big bearish candle. This saw the market slump to the bottom of a broadening-top chart pattern. Note that the 570 area capped in 1998 and 2007, so we have precedent here. The record high was 703 in September 2000.

 

Spain’s IBEX index of the 35 most liquid, free-float stocks is one readers may not be so familiar with. First calculated in 1992, with the index up 6.5 times its original value by the millennium, it includes household names such as fashion retailer Inditex (owner of the Zara brand), Banco Santander and International Airlines Group (owner of British Airways and Iberia). The index has been drifting since May last year, with long-term moving averages bearish for the past 12 months. Chances are that we’ll re-test previous reaction low points between 6000 and 6500.

 

Importantly, all indices back up the bearish outlook for so many European stock markets.