Are The PIGS About To Bring Home The Bacon?

May 4, 2021

It sure feels like a long time ago now, but it's been less than a decade since the European Union underwent a rather serious sovereign debt crisis.

This set off a roughly two year bear market for International Stocks as well as a rangebound mess for US stocks.

After this bout of volatility, most risk-assets carved out significant lows in 2016 and rallied higher until global risk peaked in 2018. Then it all fell apart again last year.

This brings us to today, where we're now seeing European countries and indexes trade right back up to their 2018 or pre-COVID highs left and right.

While diversified global indexes like MSCI EAFE $EFA and MSCI Europe $VGK recently reclaimed their former highs from 2014, 2018, and are already well above their pre-COVID peaks - they are now approaching a far more important area of overhead resistance at their pre-financial crisis highs.

Last week, we used the BRIC countries $BKF to illustrate this theme of more and more international indexes trading at inflection points. Today, we'll do the same by highlighting some of Developed Europe's long-term underperformers... the PIGS.

Brazil, Russia, India, and China (the "BRICs") have absolutely nothing to do with the PIGS countries. There is zero overlap in terms of exposure or holdings.

Here is a custom equal-weight index of the Eurozone's secular laggards - Portugal, Italy, Greece, and Spain:

Despite being completely different indexes, there is one glaring commonality... Both are currently testing key former highs.

As for the PIGS, price has rallied right back to those pre-COVID highs... Whether or not this index breaks out here will give us some quality information regarding risk appetite for global equities.

If investors are buying the PIGS, things just can't be that bad. These countries have a higher beta than their peers and tend to get bid up when investors are embracing risk.

Seeing as each individual country ETF... even Greece - is trading at or near fresh 52-week highs. At least for now, it's hard to be bearish. Neutral, fine. There is definitely an argument to be made there, and it continues to grow stronger.

But long story short, if the PIGS are leading world equities higher like they have been in recent months - we're not in an environment where we want to be betting against stocks. It's really that simple.

This participation and even near-term outperformance from the most structurally damaged areas of Europe should not come as any surprise. We've recently seen some major European heavyweights like the German DAX Index and Euro Stoxx 600 breakout of massive basing patterns to new all-time highs.

Remember, most of these EU countries and their constituent stocks have gone absolutely nowhere for decades now! This is a major development.

We've seen sector rotation, market-cap rotation, and now we're getting some real country or regional rotation... it's all been happening since last year and it's all bullish.

Here are some longer-term views at these four countries in USD terms.

These countries are all showing classic characteristics of structural trend reversals. Prices are breaking above trendline resistance to new highs after carving out formidable bases over the years, or even decades in the case of Italy and Spain.

Portugal and Italy have recently reclaimed their 2020 highs, while Spain and Greece are testing them as we speak. We're wathing these countries closely for this reason.

If the worst countries in the world are breaking through resistance at key former highs, what do you think other stocks are doing in such an environment?

They're going higher, that's what.

But these countries aren't the only one's we have a close eye on these days...

As many of you know, we love our lists here at Allstar Charts. And I'm not talking about the universes from our series of bottoms-up scans - I'm talking about a checklist of critically important charts as well as their corresponding levels of interest.

Here's one we put together about a month ago and have been monitoring. This is our current International Stock Market Scorecard. Think of this like a cheat sheet for global equities.

It's been swaying back and forth a good deal lately, but right now 75% are in bullish territory. Notice just how close some of these indexes are to our levels.

Anything can happen here, so be prepared.

The process of "weighing the evidence" is exactly what it sounds like... and this is just one simple way of doing it. As with our bull market checklist from last year, if and when more and more of these indexes reclaim or stay above their levels, it will eventually give us a clear signal that international equities are headed higher.

And if this is to be the case you better believe other risk assets like commodities and crypto are ripping higher along with equities.

What do you think? Could such a simple list really signal the next step for stocks?

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Thanks for reading and please let us know if you have any questions!

Allstarcharts Team