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Background: On August 6, Seeking Alpha published an article I wrote titled The Long Case To Buy Old Europe ETFs. This followed a late July briefer article titled Why My Money Went To Spain Today. These theses have worked out well. For example, the iShares MSCI Spain Capped ETF (NYSEARCA:EWP) has risen since the July article from $31.14 to $34.75 as of Wednesday's closing price, almost a 12% gain. Meanwhile the SPDR S&P 500 ETF (NYSEARCA:SPY) is flat from then to Wednesday's close.

Since publication of the August article, the iShares MSCI France ETF (NYSEARCA:EWQ) has risen 5%. The iShares MSCI Italy Capped ETF (NYSEARCA:EWI) has risen 10%. A lightly-traded smaller-cap U.K. fund, the FirstTrust
United Kingdom AlphaDEX® Fund (NYSEARCA:FKU) has returned 3%.

The Global X FTSE Greece 20 ETF (NYSEARCA:GREK), which I also highlighted as a highly speculative play on August 6, has risen an impressive 13%.

The SPY is down almost 1% in the same time frame.

What comes next?

The Bull Case: There are reasons why I think that it's worth playing this trend to continue. In discussing this topic below, I am not going to discuss the U.K. The comments I made in the first article linked to above about the U.K. reflect my current thinking. I am bullish on Britain's economy and on the British pound (NYSEARCA:FXB), given that quantitative easing has ended there.

1. The Fed: The continuation of quantitative easing, aka bond-buying, aka outright money-printing at the amazing pace of 6% of GDP per year far exceeds that which the European Central Bank is doing. Since investing in foreign stocks exposes the investor to currency risks, my preference is to diversify the portfolios I manage from the heavy U.S. dollar-centric stance I adopted in the summer and fall of 2011 and gain exposure to the euro.

While monetary policy appears paramount in projecting dollar weakness, that which is known may already be discounted. Other factors, such as events in the Middle East and in D.C. politics, at least have potential to weaken the dollar.

2. Valuations: It is not simple to assess relative valuations between funds. I have surprisingly found that as an individual investor without the resources to get very granular on most of the holdings of the funds I am looking at (including the SPY), Yahoo! Finance has a useful page.

One can get there first for the SPY and note the parameters, of which P/E is one of several, and I think the least useful. When I compare to the European funds mentioned above, I think they are intrinsically cheaper.

3. Cyclical factors: Spain and Italy, as well as of course Greece, have swallowed bitter pills of labor deflation. This appears to be resulting in higher corporate profit margins. Assuming they climb the wall of worry their rising stock prices tend to imply, profits may begin to do what those of U.S. companies did beginning in 2009. Higher sales volumes combined with higher profits margins can produce explosive stock market moves. Very high un-/under-employment adds fuel to the profit fire.

It was reported today that unemployment may have peaked in France. This has been suggested by the authorities to be occurring in Spain and Greece. Montly PMIs by Markit have also been supportive of the thesis that these underperforming economies may be accelerating upward. France is especially interesting. It has Socialist leadership of a type it has not had for three decades, when Francois Mitterand took the reins. For a while, the markets hated French stocks. Then some compromises occurred and France joined the bull market that the U.S. and U.K. had already been enjoying. Something similar might be happening now in the presidency of Francois Hollande.

4. Stock price histories: I showed a number of comparative stock charts in the August 6 article linked to above. There's no need to show similar charts again. Basically, the European ETFs have outperformed the SPY on a one-month through one-year basis, while having underperformed it on much longer time frames. This looks ideal to me. There's lots of stock market catch-up potential here, which is consistent with the idea that the companies in these funds have lots of potential profit increases.

5. Sentiment: While this is a slippery and non-critical factor, my sense is that there remains lots of anxiety about Old Europe alongside a growing sense of optimism that the U.S. is more or less out of the economic woods. So as a fund manager once told me, buy turmoil and sell really good news. Sentiment in my view favors tilting toward Europe for now. A lot of bad news continues to be embodied in its share prices.

The bear case: All markets match buyers, such as I have been, with sellers. There are clearly better-informed market participants than I, a Statesider who has not been across the pond in a long time. A hundred things could go wrong in any or all the countries I have been investing in. Most obviously, the euro could drop sharply against the dollar. Some financial institution could collapse in a disorderly fashion, or political turmoil somewhere might occur so suddenly that it could have economic ramifications before the ECB and other authorities could respond effectively.

Many of the countries discussed here may have intractable economic problems, and the stock markets may simply be erring in marking up prices of companies in the funds discussed.

Many of these funds are non-diversified. A large minority of the Spanish fund, EWP, is comprised of two companies. It so happens that most of the business that the largest, Banco Santander (NYSE:SAN) and the second largest, Telefonica (NYSE:TEF) do occurs outside of Spain. It is not clear that SAN and TEF are really "Spanish" plays (note I am long both SAN and TEF individually). And so on. Each fund is an imperfect play on the local economies and even on the euro.

Summary: Much of Europe has undergone and continues to undergo extraordinarily painful labor stress. The local economies may be recovering, and if so, corporations may see both sales and operating profit gains. Given reasonable current valuations, stock market performance could be robust. In addition, the aggressiveness of the Fed plus unanticipated geopolitical and U.S. political factors could further weaken the dollar versus the euro or British pound.

U.S. investors who have a high proportion of their assets denominated in U.S. dollars may wish to gain greater exposure both to non-U.S. financial assets as well as to intrinsically solid currencies other than the U.S. dollar. The battered economies of various parts of Europe may hold appeal, both as aggressive long plays and as portfolio diversifiers.

Source: Updating My Bullish European Stock Calls: Is The Trend Still Friendly?

Additional disclosure: Not investment advice. I am not an investment adviser.