European Markets Look Downright Scary

by: Sy Harding


European and U.S. markets have been moving in tandem with each other for years. They still are, both being in short-term pullbacks.

However, the plunge in European markets has been more severe, and has them ominously broken beneath their long-term 200-day moving averages.

If the U.S. market and European markets are going to continue to move in tandem, let’s hope European markets recover quickly before the U.S. market follows them down.

Here's the situation.

The economy of the 18-nation European Union is about the same size as that of the U.S., with roughly equal impacts on each other and on global growth. Germany, France, and the U.K. are the largest economies in the EU, and the fourth, fifth, and sixth largest economies in the world.

The stock markets of those major European economies have been tracking in tandem with the U.S. market for years, showing similar resilience, making new highs together.

They are still moving somewhat in tandem with each other, being in short-term pullbacks together.

However, while the S&P 500 topped out into its pullback just two weeks ago, and is down less than 4%, European markets topped out two months ago, and on average are already down about twice as much, and still declining. That has them still within the confines of a brief, normal, and overdue 10% correction.

However, in their pullbacks the major markets of Europe have broken beneath not just short-term and intermediate-term support levels, as has the U.S. market, but beneath their long-term 200-day (40-week) moving averages.

That is potentially ominous based on what usually happened in the past after similar breakdowns of long-term support.

The breakdown is blamed primarily on investors being nervous about the situation between Russia and Ukraine.

Let's hope so, as reports on Friday were that Russia announced (for the second or third time) that it will pull its troops back from Ukraine's border, and once again that provides hope that the situation is cooling off.

However, the real catalyst for the market sell-off in Europe is more likely that European economies have become seriously problematic again, which is potentially a longer-term problem.

For instance, first quarter GDP growth for the 18-nation eurozone was barely positive at 0.2%, and Germany's growth of 0.8% was the primary driver of that.

Reports are beginning to come out on second quarter growth, and this week's report was that Italy's economy slid back into recession in the second quarter. And in the last few days, it was reported that factory orders in Germany plunged 3.2% in June, after declining 1.6% in May. Indicating the weakness in the rest of the EU, Germany's incoming orders from other eurozone countries plunged 10.4%. Additionally, industrial production in Germany declined 0.5% in June, widely missing the consensus forecast of a gain of 0.3%.

Those dismal reports from Germany raise concerns that its economy may have been no better than flat in the 2nd quarter, raising the possibility that the overall eurozone slid back into recession. Meanwhile, retail sales in the overall eurozone declined again; Moody's rating services downgraded U.K. banks from stable to negative; and the economic warfare of escalating sanctions being imposed by western nations on Russia, and retaliatory sanctions by Russia, is not a positive for the economies of either side.

On markets, the pullback has European markets oversold beneath their short-term 50-day moving averages to a degree that should bring at least a short-term rally attempt.

Let's hope that if U.S. and European markets are to continue moving in tandem with each other, that European markets can rebound quickly back above their long-term 40-week moving averages before the U.S. market follows them into breaks below its long-term supports.

However, as the intermediate-term charts show, that has not happened very often in the past once that important support has given way.

It seems clear that short-term bounces notwithstanding, it is still a time to be very cautious and defensively positioned on both the U.S. and European markets.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.