Subscribers to our European dashboard will know that October was a broadly positive month for the region’s equity markets; the S&P Europe 350 posted a 1.66% total return, while nearly every equity strategy in the region gained. Additionally, the S&P Europe 350’s closing price level of 1,600 for October brought the benchmark to within touching distance of its record month-end close of 1655, set over a decade ago.
Most European market participants will view this news as cause for celebration, but technical analysts may not. Exhibit 1 shows that some of the most substantial drawdowns in the S&P Europe 350 have come after the index ended the month above 1,600. History therefore suggests that 1,600 may be a “resistance level”—the index has closed above this level on several occasions, but has not managed to stay above it for an extended period.
However, there are indications that the S&P Europe 350 may be better equipped at present to do just that.
Exhibit 2 below shows the historical sector weights in the S&P Europe 350. Prior to the precipitous drawdowns at the start of the century, the information technology sector obtained a relatively large weight courtesy of its substantial returns (orange circle); in the 24 months ending in August 2001, it posted a 278% price return—235% higher than the average for the other sectors. Six years later, the weight of the industrials sector (blue circle) grew in the two-year period leading up to the Global Financial Crisis as the sector posted a price return of 97%, 53% higher than the average for the other sectors. In other words, the period leading up to the previous highs was dominated by extreme performances in a few sectors. With more exposure to these sectors, the S&P Europe 350 was more heavily affected when trends reversed. In contrast, recent returns have not been driven by any specific part of the market (or at least not as much)—only 29% separated the best 24-month sector price return from the average of the rest of the market as of Oct. 31, 2017 (excluding real estate).
In contrast, price returns from October 2015 to October 2017 were not been driven by any specific part of the market (or at least not as much)—only 29% separates the best sector return from the average of the rest of the market (excluding real estate).
Although upcoming events may conspire against the entire market, if the S&P Europe 350 is able to maintain its current form without suffering from the drawdowns observed historically, perhaps we will come to view 1,600 as a new support for this index.