european stock index

by Albertarocks

Executive Summary

Recently I've tuned my focus to Europe in order to try to get a better handle on exactly what the hell is going on over there. Well actually, whatever is going on over there will probably forever remain a mystery to all of us... hidden under so much paperwork, lies and spin that we'd never be able to get to the bottom of it. Nonetheless, I want to know if there are any clues we can garner from across the pond if we just focus a little harder and do some meaningful analysis? Yes, I think there are.

We begin by putting together a chart of the DAX as if it were priced in units of the Dow Jones Europe Financials Index. This would be similar to pricing the S&P 500 in terms of the BKX. The only difference is that the study which follows is purely European. The first picture we're going to look at is the monthly chart of the $DAX:$E1FIN (the DAX divided by the Dow Jones European Financial Index). We have to look at the big picture first in order to see if there is in fact any pattern or relationship that suggests reason to investigate further. And immediately, we see that there is. The result is a ratio which in turn can be compared directly to activity within the DAX itself. I've also added the European Financials Index as a separate entity in its own panel in order that we can look at all 3 at the same time and in the same context. I realize it's a rather long lanky chart, but it contains a ton of information and there's not much point in presenting a chart that lacks useful data:

The first thing we want to know is whether or not any major top or bottom in European equities (using the DAX as the most logical proxy for all) coincides with a major change in the ratio. In other words, was there any sort of major shift in the ratio at the time that the DAX made a sudden change in trend? If so, which of the components contributed the lion's share to that shift? We also want to know what happened within the European financial sector at the time of that abrupt change. In the pursuit of studies like this, occasionally it becomes apparent that there doesn't seem to be any such relationship occurring at all. Indeed, there have been times when I have put together a study similar to this with the expectations that some sort of meaningful correlation would pop right off the chart, only to find that there in fact was none. I can occasionally be surprised by such a revelation but hey... if I'm on the wrong track, I recognize that in a hurry, dump it and move on to the next one. But of course, when we're talking about the German stock market and the entire European financial district in the same sentence, surely there has to be a meaningful relationship that can lead to clues? And of course... there is.