Monday, November 18, 2013

My System Signals It's Time to Sell Italy, Buy Spain: EWI, EWP

Europe continues an uneven economic recovery, but the stock markets of that region do have significant trading potential. This week, my 26-week rate of change (ROC) system is rotating from one European market into another.
Eurozone GDP data helps explain why the European Central Bank (ECB) recently surprised investors with an interest rate cut. Economic growth was lower than expected, and expectations had actually been very low to start with. GDP grew just 0.1% in the third quarter, down from the 0.3% expansion of the second quarter.
Germany led the eurozone with an expansion of 0.3%, in line with expectations but down sharply from the 0.7% growth of the previous quarter. Italy also met expectations with a decline of 0.1% for the quarter, the ninth straight quarterly contraction. Over the past 12 months, the Italian economy has contracted by 1.9%.
On the news, European markets were generally weak. The reaction to the news about Italy's mediocre performance caused my 26-week rate of change (ROC) system to issue a sell on iShares MSCI Italy Capped (NYSE: EWI). The relative strength (RS) rank of EWI also dipped below 70, which reinforces the sell signal.
EWI Chart
While EWI has delivered a sizable gain this year, it is down about 4% since my system signaled a buy in mid-October, and the ETF is still more than 50% below its 2007 high. U.S. stock markets have fully recovered their bear market losses, but European stocks are struggling to regain ground in a slow economy. (more)

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