Maybe Europe's fifth bailout, this time with Cyprus, isn't a
charm after all.
ETFs linked to stocks in Italy (NYSEARCA:EWI) and Spain
(NYSEARCA:EWP) got clobbered today. In U.S. trading, EWI 4.06% fell
while EWP dropped 4.70%.
Now that European stocks have had a jolt, certain
prognosticators are making the bold claim that "European stocks are
oversold." Are they right?
What is "Oversold?"
Before we can understand if European stocks are oversold, we must
first define what oversold means.
puts it this way:
"Oversold is a condition in which the price of an underlying
asset has fallen sharply, and to a level below which its true
value resides. This condition is usually a result of market
overreaction or panic selling."
Currently, banking/financial stocks represent almost 30% of the
iShares MSCI Italy ETF and 40% of the iShares MSCI Spain ETF. To be
truly undervalued because of oversold conditions, an investor must
first be convinced that Italian and Spanish banks are properly
valued by today's equity market. What's an accurate valuation for
stocks without massive monetary stimulus behind them? What's the
proper valuation of insolvent banks?*
History shows us that Mr. Market has a special knack for
miscalculating equity valuations.
What about the performance of European equities? Do they resemble
To be oversold would actually suggest that European stocks have
been badly beaten up - much like the time when
Jack Dempsey put down Jess Willard seven times
in the first round. Is that the case?
Over the past year, the Vanguard MSCI Europe ETF (NYSEARCA:VGK)
a broad measure of European stocks hasn't suffered - but rather
gained 11.05%. And even with Europe's latest circus in Cyprus, VGK
still has a 0.88% year-to-date gain. Furthermore, VGK's share price
trades above closely watched technical levels like the 200 day
moving average. If you believe this is the sort of price action
that describes oversold, you're drinking
Similarly, stocks in individual countries like Germany
(NYSEARCA:EWG) and France (NYSEARCA:EWQ) have recorded double digit
one-year gains. Even stocks in deeply troubled places like Ireland
(NYSEARCA:EIRL) and Spain have posted yearly gains. EIRL alone has
surged more than 24%! Let the discerning reader decide for himself
or herself if that's the tell-tale sign of oversold
Don't be hoodwinked into believing European assets are oversold.
Based upon sheer valuations and recent performance, oversold hardly
describes stocks or ETFs linked to securities prices in this
Prudent investors and traders have been given ample chances to
get out of publicly traded zombies while the gettin' is still good.
They just have to be smart enough to decipher between propaganda
If there's two things you remember in our discussion of
oversold, let it be this:
1) Oversold assets canbecome even more oversold during extreme
2) Oversold never applies to insolvent bank, companies, or
governments. (Just ask the poor saps holding "Bank of Cyprus"
Through a detailed analysis of valuations, sentiment readings,
technical indicators, and historical parallels, the
ETF Profit Strategy Newsletter
evaluates financial markets. The brand new April issue includes a
detailed short, mid and long-term forecast for stocks along with
corresponding profit strategies.
*Just days before it collapsed, Lehman Brothers, according to
many financial experts was "oversold" and "undervalued."