European Financials and Risk Appetite

From the desk of Tom Bruni @BruniCharting

Stabilization in European Financials has been a big part of our bull case as they're one of the largest sectors of the Stoxx Europe 600, our broad measure of European stocks, and many individual European countries.

The other aspect of it is risk appetite. If the worst of the worst sectors is catching a bid, then market participants are not likely pricing in the end of the world.

With that in mind, let's take a look at what we're seeing in the space right now and what it means for risk appetite.

Here are European Financials (EUFN) on an absolute basis. After confirming a failed breakdown and bullish momentum divergence by closing back above their December lows, prices rallied nearly 20%, but are now experiencing waning upside momentum.

After running 18% in 10 weeks, a pause would be constructive. The question now is whether prices can digest these gains through price, time, or both. Being bullish Equities we'd prefer the latter, but the market doesn't care what we want.

Click on chart to enlarge view.

Here's a weekly chart showing the last two times weekly momentum diverged positively and prices reversed to the upside. Will this history with a sample size of 2 repeat itself? Who knows, but it'd be irresponsible to completely ignore the rallies that occurred following the cyclical bear markets of 2011 and 2015-2016.

Another chart we're watching is European Banks relative to the STOXX Europe 50, which remains stuck below its 2016 lows with momentum in a bearish range. A break back above those lows with momentum getting overbought would be very constructive and signal improving risk appetite.

We've seen bounces in European Banks before, but they've all unfortunately ended by resuming to the downside. If Equities as an asset class are going to resume their upward trend, then bulls want to see continued improvement in this space.