France and Germany Outperforming Despite Euro Debt Woes

Includes: EWG, EWJ, EWQ, FXI, SPY
by: Moby Waller

The chart tells the tale, as we often paraphrase Jesse Livermore's famous quotation. And you can certainly spend thousands of hours macro-analyzing the debt & economic situation in both the U.S. and Europe. But it's often more instructive for shorter-term trading & investing to examine the price action itself and see what it tells us. After all, much of the expectations, forecasts and sentiment of the big traders is encompassed in the prices/charts.

I discussed previously in the BigTrends Daily TrendWatch that this may be the year of Europe (or at least many of the countries 'over there') and that trend has clearly continued. Take a look at the 52-week relative performance of these major country ETFs:

iShares Germany (NYSEARCA:EWG) – Yellow
iShares France (NYSEARCA:EWQ) – Blue (no options available on this one currently)
iShares Japan (NYSEARCA:EWJ) – Red
iShares China (NYSEARCA:FXI) – Green

52 Week ETF Performance Chart -
(click charts to expand)

Keep in mind that Germany and France are the 2 biggest members of the European Union (NYSEARCA:EU) in terms of GDP, comprising over 36% of the total (according to Wiki data). And in terms of these US Dollar trading ETFs, they are strongly outpeforming both the US stock benchmark S&P 500 and the 2 biggest Asian country ETFs of Japan and China.

As to the 'Why' of this outperformance, it's an extremely complicated situation between these 3 regions of the world. A doctoral thesis could be written just analyzing these various economic situations, currencies and environments. Intuitively one might think that the faster growing China would be the strongest, but again, the charts don't lie.

And that's the key here, in my analysis — the trend is your friend. You don't have to parse every G-20 meeting minutes and crunch Debt numbers by country/state/region to recognize this trend and, for example, have jumped onto the EWG & EWQ bandwagon months ago, garnering continued relative outperformance.

This trend has continued thus far as we quickly approach the mid-point of 2011, see the 2011 performance graph below:

2011 ETF Performance Chart

Again there is a clear delineation between the 2 Europe country ETFs, which are up 10% YTD, and the S&P 500 (SPY) which is up only 3%. And we see the 2 Asian country ETFs are down YTD. So a simple difference in asset allocation based on trend following (or relative strength or other measures) for traders & investors can easily make the difference between being profitable or at a loss for the year.

You don't have to be a Harvard-trained economist (in fact I would trust the judgment of most professional traders over most PhD economists, because they literally put their money where their mouth is) to profit from global and sector trends using ETFs and options. The chart, including price performance, will show you where money is flowing, where support/resistance levels are, what momentum indicators are showing, where the volume is, etc — it basically encapsulates the multitude of complex fundamental factors and expectations into a visual summary.

Disclosure: I am short FXI. ETF Tradr clients are in short FXI option position.