From the July 01, 2012 issue of Futures Magazine • Subscribe!

Trading in Europe’s wake

History lesson

European stock markets weathered the same cyclical stock bear from mid-2007 to early 2009 that U.S. indexes experienced. In “Index comparison: January 2007-March 2009” (below) the markets are indexed off the preceding SPX cyclical bull’s top in October 2007. While the FTSE’s performance was a bit better and France’s a bit worse, all these lines are essentially interchangeable.

The major European stock indexes plummeted during late 2008’s epic stock panic, as well. It was truly a global event. Even after that incredible fear super storm, all the indexes ground lower to secondary lows in early 2009, and their total cyclical-bear losses were quite similar. The CAC 40 lost 59.2%, the SPX 56.8%, the DAX 54.8% and the FTSE 100 47.8%. Europe and the United States traded like one singular market during the last cyclical bear.

This highly correlated affinity continued into the subsequent cyclical bull, which was born in March 2009 and persists to this day. “Index comparison: January 2009-March 2011” (below) re-indexes each country’s leading stock index to 100 on the day the SPX bottomed, its bear low. While early performance was similar, by mid-2010 there were some definite performance divergences opening up in the various national stock markets.

As the European sovereign debt crisis deepened in spring 2010 — around the time of the first €110 billion Greece bailout — the indexes’ performances began to diverge. While the markets experienced their first collective cyclical bull correction then, France’s and Britain’s sell offs were more severe. The CAC 40’s drop made sense given French banks’ huge exposure to sovereign debt, but a similar fundamental explanation was lacking for the FTSE’s weakness.

While the SPX weathered a sharp correction as well, it had been the best performer prior to the drop, meaning its selling started from a higher level. Thus, its drop looked and felt more moderate than the CAC 40 and FTSE 100 plunges. Germany, as Europe’s strongest economy with the least relative sovereign-debt exposure, corrected the least and the DAX’s swoon was modest.

Since that first correction, the United States and Germany have been the best performers by far. France slowly recovered from that correction as worries about its banks’ sovereign-debt holdings persisted, barely hitting new to-date highs. And the United Kingdom, now fighting growing government overspending problems of its own, settled into a similar under-performing pattern between mid-2010 and mid-2011.

By their respective peaks early last year, the DAX and SPX enjoyed commanding leads with 105.3% and 101.6% gains. Lagging a full 30 to 40 percentage points behind were the FTSE 100 and CAC 40, at just 73.4% and 65.0%. These growing divergences were important, because indexes with smaller gains ought to have corrected less in this cyclical bull’s second correction.

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