European Banks Need To Stop Crashing

JC Parets
May 12, 2016

I think the bull case for the stock market starts with the European banks. When you talk about bull markets and uptrends, financials need to participate. There's no way around it. If you have European banks crashing to new multi-year lows, it's hard to have a sustainable uptrend in equities. As bearish as I am towards stocks these days, the bull case begins with this sector. It would be irresponsible of me not to recognize that.

Today we're comparing the Financial Sector in Europe to Financials in the U.S. This is a great visual comparison that we look for to determine whether or not there is risk appetite for bank stocks. If European Banks are the ones dragging down the space, we want to see them start to outperform U.S. banks as evidence of risk appetite. So far all we've seen is the exact opposite: new lows, new lows, new lows.

5-12-2016 8-56-21 AM eurpean financials vs us financials

This is the Dow Jones Europe Financials Index vs the Dow Jones U.S. Financials Index. Last year this ratio broke down below key support and then retested it successfully in May at the same time that the S&P500 was putting in its peak. Notice how this ratio has gone down ever since, just like the S&P500.

If we're going higher in stocks, I think it needs to start with financials. Any further weakness will make it awfully difficult for stocks to rally from here. The first thing stock market bulls need to see is this chart to stop crashing. I think that is the lower probability outcome, from where we sit today, and both this chart and the S&P500 are likely to continue lower.

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Tags: $EUFN $SPY $XLF

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