Seriously, What's Europe's Problem?

I mean, we're just trying to have a nice little bull market over here in the U.S., minding our own business, and they gotta go underperform and diverge to ruin all the fun. Seriously though, what's Europe's problem?

OK just kidding. But not really.

I think I've been pretty vocal over the last month or so about the underperformance in Europe. I'm not going to link to posts or tweets or anything, you can go back and find them if you want. That's not the point of this. Today I want to pull up a very simple chart of the Euro Stoxx 50 Fund to look at, not only how broken it has become, but also how vulnerable its condition was coming into this weekend.

Here is a daily bar chart of "The FEZ" as we like to call it at our shop. I remember the original  breakdown like it was yesterday. It was February 4th and I had just woken up in a New Orleans hotel room after a memorable night at the Super Dome. I was extra dehydrated that morning (can't imagine why). And European averages were getting destroyed. Germany was down 3.6%, France down 4%, Spain down 5.3%, Italy down 5.8%, the entire Euro Stoxx 50 down 4.5%. The list goes on and on. And I said to myself, "this is not bull market behavior". And it certainly wasn't. Healthy stocks and assets don't get smacked in the face like that overnight (yes this all happened overnight). And by the way, Emerging markets were getting smoked that day also, but that's another discussion for another day. Let's stick with Europe for now:

You can see that there was an island reversal of sorts created on that Monday morning breakdown after the Super Bowl. Along with that came a bearish divergence in the Relative Strength Index. As prices made fresh highs into that "island", if you will, momentum was already rolling over. This is shown clearly in the chart above. Go run through a some of the individual countries and you'll find similar looking charts.

Then a few weeks ago we had that Monday Italian Election fiasco. That day, confirmed a hard breakdown below the uptrend line from last summer's lows. Again, stocks and assets in bull markets don't behave like that. They just don't get crushed in one day the way these have. Italy down 10% in 6 hours? You don't need to be a technician to know that isn't bull market behavior.

Now since then, US Markets have continued to rally into historic territory. Investors waving their hands in the air like they just don't care. And maybe they still don't. We'll see. But European markets are vulnerable. They've rallied back up towards that broken uptrend line and retested it this past week.

Even the Euro itself peaked on that Super Bowl weekend. Look at $EURUSD Daily bars. You think it's a coincidence that the currency topped out at the same time that their equities did?

Europe is vulnerable. Not really an opinion, but more of a fact I think. So will the US continue to shrug it off? We haven't seen the two of them disconnect for this long since 2009. This is a chart comparing the peaks in Europe with those of the US. Typically, Europe tops out first, and then the US gets the memo and rolls over. Well, we're going on 6 weeks now without the US joining the correction. Will this continue? Or will the US play catch-up?

European stocks better start rallying very soon for none of this to matter technically. And by soon, I mean like right now.

You see what I did there? Didn't have to mention Cyprus in the entire post.

Tags: $SPY $FEZ $EWP $EWI $EWG $EWQ $EURUSD $FXE