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Don’t be fooled by the pause: the EuroStoxx 50 still looks vulnerable

07 March 2008

The Macro Trader’s view:
In hindsight, last year’s price action with its many corrections, was a topping-out process driven by the burgeoning sub-prime mortgage crisis/credit crunch. Since then markets across many asset classes have become increasingly concerned over the possibility of a US recession. Because the banking industry in Europe holds varying tranches of Sub-prime mortgage securities, the Euro zone is vulnerable to a serious economic correction of its own.

However, after a sharp sell-off in January and a swift short covering rally, this market has since moved mainly sideways, as the Bulls have failed to push the rally further, but neither have the bears been able to take the market lower.

The reasons for this impasse are:

1. In the Euro zone, growth has as yet held up well; a slowdown is expected, and although data has weakened, not to the extent that it has in the US, so the forecast of gloom has yet to manifest, additionally

2. In the US, apart from the shock from the Sub-prime crisis, investors are increasingly worried about the health of the US Bond insurers which pose a potentially graver threat should one or more fail.

Around these two factors are the normal ebb and flow of data and corporate earnings which exert their own influence on the markets, and although recent Euro zone PMI reports have come in a little better than expected, several Banks have recently announced increased loss provisions against their Sub-prime holdings. In some cases those provisions are significantly above those initially announced.

Moreover, the Fed seems more concerned about the US economy than it has at any time since the start of the New Year. This week’s Beige book painted a picture of a weakening economy which contrasted a little with the slightly better than expected US ISM non-manufacturing report.

All of this continues to push the Dollar lower. And the Euro stands at an all time high which worries Euro zone policy makers as they fear the negative impact Euro strength is having on the Euro zones economy.

Add to this the ongoing rally in oil which has seen that market firmly establish itself above the US$100.00 a barrel mark, with OPEC refusing to pump more oil, and it isn’t difficult to see why stocks are again under pressure.

We judge equities are in a bear market and we expect the DJ Eurostoxx50 index to reflect that fact and trade much lower over the coming weeks and months.

The Technical Trader’s view:
Bull trends continue by finding support at successive highs.

The market found the High at 3877 good support in
March 2007.

But the second test of that level broke it.

The bull trend is over.

Has a bear trend begun?

The critical test of the bear trend would be the resistance at 4023. But the market doesn’t look like retracing to that level anytime soon.

Look closer at the short-term structure of the market...

The market has struggled to get back through the 3877 broken support.

And in so doing it has formed a Continuation Head and Shoulders Top with a minimum move implied down to 3425.

The pause at the Neckline caused some uncertainty.

But today’s price action is very encouraging....

Mark Sturdy
John Lewis
Seven Days Ahead

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Ride the Eurodollars into the Recession

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Driver! Follow that Euro!

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