Stock Up On Euro Stoxx

 |  Includes: FEU, FEZ
by: The Laptop Investor

With the weak hands out of the European region, it seems everyone has been treating it like a wasteland that no one dare touch. While definitely a trade with a long term time horizon, it certainly has many factors going for it. Since the GFC, the Euro Stoxx has wavered in a sideways trajectory with the 2000 level providing firm support.

In recent times, it has touched that support during the GFC, US Credit Downgrade and Greek Debt Crisis/Greek Elections. The significance of this is the level of pessimism that was in the market at the time, not only for Europe, but the global economy.

The Euro Stoxx is so hated that with all the pessimism in Europe and the global economy, it could not dive under 2000. This is reminiscent of the Nikkei.

On the below chart, note the level for the year 2000 and pre GFC.

Euro Stoxx IndexClick to enlarge

The Euro region still has some way to go before it can be said that it has recovered. Unemployment and the amount of people employed still is very much a concern, GDP growth is negative and new car registrations are decreasing. Business and consumer confidence is on the rise however. Overall, while there are some leading indicators trending downwards, it appears the rate of decline is steadying and a possible plateau is forming.

When examining the Euro region, I find it akin to the U.S. economy, albeit lagging behind in its development and growth. It's clear the U.S. economy has been able to grow given the stimulus Ben Bernanke and the US Fed are pumping into their economy. This has seen the S&P500 (NYSEARCA:SPY) reach record levels.

Some may still have concerns given China's slowdown and the influence it has on the global economy. While Europe imports from China, its exports are mainly machinery, vehicles and manufactured goods, predominantly to the United States and United Kingdom, and to a lesser extent, China, Russia, Switzerland and Turkey.

While time will tell if Europe will follow in the same footsteps, a telltale sign that the Euro Stoxx is destined to go higher is that the weak hands are largely out the market, and Mario Draghi, president of the ECB, announcing it will do "whatever it takes" to preserve the Euro and ultimately bring stability and growth back into the region. Further, the smart money appears to be taking note and talking about this very trade.

So while there still is plenty of fear gripping Europe, the market has factored in the prevailing issues, and I'm confident we're past the point of maximum pessimism. While business and consumer confidence is on the rise, which is reassuring, I personally use another instrument to measure the level of optimism, and that is the bond yields.

If we look at Italy and Greece in particular, we can see the yields on their 10 year bonds have retreated immensely from their highs, when Europe was in disarray, and one could argue, at the 'point of maximum pessimism.'

Italy YieldsClick to enlarge

Greece YieldsClick to enlarge

Trading the Euro Stoxx directly, can be done in a number of ways. For an advanced method where your view is one of growth in Europe, look at my earlier article on the Euribor. For this article, I will stick to simple trading methods so retail investors can take advantage.

There are many ETFs that track the European markets. However, I have based this article and calculations mainly on the Stoxx 50. Trading this can be done via the following ETFs, SPDR Stoxx Europe 50 (NYSEARCA:FEU) or SPDR Euro Stoxx 50 (NYSEARCA:FEZ).

For an asymmetric payoff, one could also choose to buy a long dated call while volatility is rather subdued. Dependent on the broker, these can be bought out to 2018.

As a closing thought and as part of your due diligence, look at what it took for the U.S. markets to reach its current highs and also take note of the what made the Nikkei earlier in the year break free from its sideways motion. You may find Europe is trying to light up a match from the same packet.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.