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Europeans Stocks are Poised to Outperform

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Eurozone stocks reacted very positively to the ECB decision to lower short-term rates and offering funds to banks to lend to smaller Euro companies. EMU Index iShares (NYSEARCA:EZU) surged to a new high late in the week. Eurozone stocks did even better than the U.S. For the week, the EZU gained 1.8% versus a 1.3% gain for the S&P 500. The EZU includes stocks in eurozone countries with the biggest holdings in France, Germany, Spain, the Netherlands, and Italy.

The ECB president hinted that some form of quantitative easing might be in the works. That combination would seem to favor Eurozone stocks as EMU iShares reached the highest level in six years this week. The falling ratio shows Europe underperforming the U.S. since 2009. The EZUSPX ratio has risen since 2012, however, and appears to be bottoming. It has already broken a downtrend line extending back to 2009. An upside breakout by the ratio would suggest that Eurozone stocks are starting to do better than those in the US. Their bond markets were also especially strong. The reasoning there is that some money flowed into bonds in those smaller countries in the search for higher yield.

A ratio of the S&P 500 divided by the 30-Year Treasury Bond price having broken a downtrend line extending back to 2000, which signaled a major shift in favor of stocks. It mentioned that the stock/bond ratio had been consolidating during the first half of 2014 within a major uptrend. The S&P 500/ 30-Year T-bond ratio starting to break out of a triangular formation that’s been in effect since January. That means that the asset allocation pendulum is swinging back to stocks. The S&P 500/T-Note ratio is now trading at the highest level in 14 years.

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