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European Stock Indexes As A Leading Indicator For SP500

|Includes: EWG, EWP, EWQ, EWU, SPDR S&P 500 Trust ETF (SPY)

With so many news coming out of Europe this year, I decided to see if US investor is paying attention to what is going on in Europe and if so, what major countries in Europe lead US investor actions. Since I already use Bloomberg, to conduct my analysis I chose to use a new App listed in Bloomberg App Portal called Strategy Exlporer published by IntuQuant LLC. If interested you can find more information on this App at www.intuquant.com

I setup a simple strategy to analyze daily return of four European equity indexes (DAX, CAC40, FTSE100 and IBEX35) as a leading indicator to either buying or selling SPY ETF. Basically if a daily return, defined as the percent change between day's close and open price level of a European index, is negative I sell SPY the next day while if positive I buy SPY the next day. I ran this strategy four times, once for each Europen index as a daily backtest with two bins. Bin one buys SPY, while bin two sells SPY.

What I found is that DAX has been the best European stock market index to predict the next day's action of SP500, followed by CAC40, IBEX35 and lastly by FTSE100.

If you invested in SPY based on the previous day's return of DAX, you would have made a nice return of 32.84% with a very good sharpe ratio.

Here is the summary for each index.

DAX is used as a leading indicator

  • Analysis period : 257 days
  • 12 month return : 32.84%
  • Sharpe ration : 2.58
  • Worse Draw Down : -5.82%
  • Longest Recovery : 52 days
  • Win Rate : 54.47%
  • Loss Rate : 43.58%

CAC40 is used as a leading indicator

  • Analysis period : 257 days
  • 12 month return : 22.70%
  • Sharpe ration : 1.77
  • Worse Draw Down : -5.33%
  • Longest Recovery : 52 days
  • Win Rate : 52.53%
  • Loss Rate : 45.53%

IBEX35 is used as a leading indicator

  • Analysis period : 257 days
  • 12 month return : 6.99%
  • Sharpe ration : 0.557
  • Worse Draw Down : -9.36%
  • Longest Recovery : 105 days
  • Win Rate : 49.81%
  • Loss Rate : 48.25%

FTSE100 is used as a leading indicator

  • Analysis period : 257 days
  • 12 month return : 1.74%
  • Sharpe ration : 0.12
  • Worse Draw Down : -10.67%
  • Longest Recovery : 153 days
  • Win Rate : 47.86%
  • Loss Rate : 49.81%

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.