Broadening Delusions: The Inconvenient Truth about European Equities
The year 2013 promises to be an eventful one, if for all the wrong reasons. Perhaps the most significant economic issue in our global community is the reluctance of Washington policymakers to negotiate a deal to avoid the dreaded “fiscal cliff.” Although a speculative opinion, the likely outcome would be a song and a dance by Congress and the White House which, after a series of comedic darkness, a deal emerges: Middle-class Americans can continue buying flat-screen televisions and stuffing their faces with Big Macs! However, the artificial stimulus that a deal provides will be short lived. The equities sector will continue rising towards new highs but informed traders will notice with alarm the constricting range of the price action the various indexes are leaving behind. At some point, the “paper bulls” will lose confidence and a mass exodus will ensue. You can use your imagination to fill in the rest of the story.
You may ask, but what about the rest of the world? As economic experts from Puplava Financial Services have pointed out, the fiscal cliff is a pre-contrived issue; a hard deadline that was conveniently erased from the mainstream media’s calendar on their way to election season ratings. Now that that particular dust has cleared the fiscal cliff has been rebranded to divert eyes away from another crisis: Europe.
Let’s take a look at Germany’s main stock market index, the DAX:


Based on chart history, we know that the week of May 13th, 2007 was the epicenter of a decidedly bearish technical pattern that correctly (and unfortunately) predicted a major crash in the global financial sector. We also know that anyone who espoused “doom and gloom” scenarios based on a study of the technicals at that time would have been viewed as a tinfoil hat wearing conspiracy nut. However, we now realize through the prescience of hindsight that the broadening wedge was in fact the market’s incarnation of human psychology at its most gluttonous. The bulls were irresponsibly driving prices higher while the bears were desperately trying to find fair valuation, thus leading to huge discrepancies in range. This tug-of-war couldn’t last forever, and finally the bulls let go. This inevitably gave victory to the bears, but the sudden loss of tension between the two suddenly sent them sprawling to the floor. They got fair market valuation and then some!
Of course, lessons that should have been learnt were quickly brushed aside, leading to yet another ill-harboring technical formation, the bearish wedge. Again, from a cursory glance, it looks like we’ve made a recovery and that we’re on the verge of a new economic renaissance; as some in the mainstream media have called it. After all, who can argue with a rising trend? The problem is context. None of the massive bull runs over the past decade have been sustainable, thus suggesting that any positive move in European (or American) equities should be viewed with a healthy dose of suspicion.