The recovery in Europe looks impressive

Key points:

• The percentage of European countries in a correction cycled from 100% to < 10%
• After similar reversals, the MSCI Europe Index was higher 88% of the time over the next three months
• The recovery contributed to an increase in absolute and relative trend scores for countries in the region

The recovery and trend backdrop across Europe looks bullish

While a bounce back in Europe looked like a good bet as sentiment turned apocalyptic over the potential for an energy crisis, the recovery continues to gather steam, which is somewhat surprising given that European indexes contain higher weightings in value stocks, which are lagging growth stocks on a YTD basis.

As of the close on Wednesday, the MSCI Europe Index showed a YTD gain of 13% in USD terms, outpacing all other global regions and the 7% gain in the S&P 500.

As European indexes recaptured higher and higher price levels, the percentage of European countries in a correction (> 10% from a 252-day high) cycled from 100% to less than 10%, triggering a bullish signal for the region.

From a regional perspective, the recovery in Europe looks significantly better than anywhere else.

Similar reversals preceded excellent results

When the percentage of European countries in correction territory cycles from 100% to less than 10%, the MSCI Europe Index tends to trend higher across all time frames. In every case, the signal showed a gain at some point in the first three months. And drawdowns over that same horizon were benign.  

Absolute and relative trend scores

European ETFs dominate the list of countries with perfect absolute and relative trend scores. And most of those countries are registering new relative highs in the last week. 

When I compile all the relative trend scores into a composite, Europe has over 93% of its countries with a positive score versus the S&P 500.

The composite that measures absolute trend scores also shows over 93% of European countries with a bullish trend backdrop. Once again, Europe leads all regions. 

One measure of Leading Indicators is increasing for European countries

Several European countries have seen the OECD's Composite Leading Indicators (CLI) series increase for four consecutive months. While none have triggered a buy signal for the model I created to capture a reversal in leading indicators, bullish trend scores reflect the improvement.

What the research tells us...

The case for a continuation in the bullish backdrop for European indexes looks compelling, especially compared to other regions around the globe. European countries in a correction cycled from 100% to less than 10%. After similar signals, the MSCI Europe Index was higher 88% of the time over the next three months. With several countries in the region maintaining bullish trend profiles and improving leading indicators, the weight of the evidence looks favorable for European indexes.