European stocks rallied to their highest levels in months
after the German Constitutional Court allowed Germany to support
the eurozone's new 700-billion-euro bailout fund to help resolve
the zone's debt crisis. The euro's strength against the dollar
also boosted gains for investments there denominated in
Global X FTSE Greece 20
), up 5.6%, outperformed all stock ETFs, rising to its highest
price in nearly six months. It's climbed for eight straight days
without taking a breath. It sports a very healthy 84 IBD Relative
Strength Rating and a high Accumulation/Distribution Rating of A.
That means its outpacing 84% of the market and institutions are
heavily buying shares.
IShares MSCI Spain Index (
), up 1.6%, rose to a five-month high. It has a weak RS Rating of
45 but a healthy B+ Acc/Dis Rating.
IShares MSCI Italy Index (
), up 1.6%, also reached a five-month high. It has 67 RS and B+
IShares MSCI EAFE Index (
), tracking developed foreign markets, rose 0.7% and touched a
four-month high. It's 1% above a 53.02 buy point in a classic
cup-with-handle chart pattern. It has a moderate 52 RS and C+ for
All of these ETFs broke above their key 200-day moving average
last week, confirming a bullish trend change.
PowerShares DB U.S.
Dollar Index Bullish (
) shed 0.09%, whileCurrencyShares Euro Trust (FXE) added
Market Strategists Reaction
Germany's Federal Constitutional Court -- the equivalent of
the U.S. Supreme Court -- ruled that the country's
190-billion-euro contribution to the European Stability
Mechanism, or ESM, can't be increased without legislative
approval. The ESM was established to support indebted countries
and replace existing temporary fund programs: the European
Financial Stability Facility (EFSF) and the European Financial
Stabilization Mechanism (EFSM).
"Without Germany, the eurozone's largest economy, this
wouldn't be possible," said Mark Martiak, a wealth strategist at
Premier/First Allied Securities in New York. "A more unified
fiscal policy across Europe is what global markets were looking
German Chancellor Angela Merkel and other leaders of the
17-nation eurozone have no other choice but to save the indebted
countries from "economic implosion" in order to preserve the
euro, said John Alan James, a professor at Pace University's
Lubin School of Business in New York and an expert in European
"If the euro goes, the Deutsche Mark comes back roaring in
value and German exports within Europe and abroad will suffer,"
James said. "Is it a wise policy? No. But like others, I see no
other alternative in the short run."
He believes the bailout fund will offer economic stability for
two to three years, so long as the U.S. economy doesn't fall back
"We must all hope that the U.S. economy -- the global (growth)
engine -- can revive within the two to three years that the ESM
keeps the eurozone on oxygen," James added. "Either we get back
to sound economic policies within the next few years or our
global economy may sink to levels that would make the 1930s look
like a picnic."
The Bearish View
The market bears, on the other hand, contend this development
doesn't change Europe's plight and that the market already had
expected the ruling in favor of the bailout.
"This and every other attempt to solve the European debt
crisis involving conditions will fail since core countries like
Germany will demand conditions and distressed countries will
demand no conditions," said Jeffrey C. Sica, president and chief
investment officer of Sica Wealth Management in Morristown, N.J.
"I expect this rally to be extremely brief once investors realize
that the debt level in distressed Europe far exceeds the 190
billion euros that Germany is willing to contribute and that the
conditions which the ECB will demand are impossible for
distressed Europe to meet."
IBD recommends that investors follow the trend and trade what
you see -- not what you or others think -- because the news is
always the worst at the bottom and overall sentiment is at its
worst. The backstop is cutting all losses at 8%.
"The thing to remember is the market is forward looking," said
Ryan Detrick, senior technical strategist at Schaeffer's
Investment Research in Cincinnati. "The fact that we are breaking
out to new multiyear highs here is saying the market doesn't view
(the U.S.) fiscal cliff or the European issues as a major
hindrance going forward.
"Sure they are fun to talk about," he added, "but bigger
picture, there are other factors driving us higher."
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