Europe's Bear Market: Europe 350 Vs. Euro Stoxx 50

by: StopAlerts

The Europe 350 (proxy IEV) is an index of the 350 largest companies in Europe. It is down about 30% from its one-year high.

A big question is whether the 2010 low can hold as a support level in this European bear market.

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The blue lines are retracement lines from the 2007 high to the 2009 low. The red lines show price levels that are respectively 5%, 10%, 15% and 20% below the one-year high.

IEV includes companies from the U.K.,Switzerland and Sweden as well as the eurozone. As a result, it is doing better than the Euro Stoxx 50, which is limited to companies in the eurozone.

As Europe's sovereign credit problems escalate, that index is crumbling. It is in free-fall now with no visible support between the current price and the 2009 low.

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The price this morning (Monday 9/12) marked by the thick blue line, is about 40% below the one-year high.

Those who use stops on FEZ and who bought this ETF in 2010 would most likely be out of the position at this time. Those who bought it recently, have little to go on in terms of charts to determine when and whether to exit.

The 2009 low could potentially be a support level, but unlike 2008, the eurozone is at the center of the problem instead of the periphery.

Also unlike 2008, where the break-up of the U.S. was not a question, in 2011 the break-up of Europe is a possibility being discussed in some quarters.

The list of holdings in the index includes top names:

The SPDRs site reports these statistics for the ETF:

  • trailing dividend 5.4%
  • return on equity 14.44%
  • estimated 3-5 year EPS growth 4.54%
  • price to cash flow 3.46
  • trailing p/e ratio 9.53
  • forward p/e 7.87

The constituents of the index have substantial non-European operations and sales, which suggests that their earnings and growth are not limited by European GDP changes.

The more diversified Europe 350 (NYSEARCA:IEV) has a very different top 10:

The iShares site reports these statistics for the ETF:

  • trailing dividend 3.17%
  • traling p/e 13.55

Fully 54% of the assets of IEV are in companies domiciled in the U.K., Switzerland and Sweden, which are outside of the eurozone.

However, the difference in geographic segmentation of the business interests of the holdings of the two indexes (Europe 350 and Stoxx 50) may not be as great at the differences in their valuations. One of the two may be out of line.

Also of great significance, is the difference in sector allocations. IEV is heavier in consumer staples, healthcare and energy, but lighter in financials. Given the mess banks are in over the European debt crisis, IEV is better positioned.

Is the Stoxx 50 too beaten down, or is the Europe 350 too optimistic? Is IEV likely to fall farther if Europe gets worse? Has FEZ been taken down to far in the flight to safety? That's a tough calculus, but one may be worth some thinking time.

Disclosure: is a service of QVM Group LLC, a registered investment advisor. QVM has long positions in TEF, NVS and RDS.A; and does not have positions in any other mentioned security as of the creation date of this article (September 12, 2011).

Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice. You are responsible for your own investment decisions. This article is presented subject to our full disclaimer found on the QVM site available here.