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European Markets: Are 'Happy Days Here Again'?
Page one of The European Financial Forecast: A chart of Euro Stoxx volatility reveals if a drop in fear means a rise in stocks.

By Nico Isaac
Thu, 07 Mar 2013 10:15:00 ET
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When the 2007-2009 financial crisis nearly unravelled the global economy, many investors hid under their virtual beds, and parked the bulk of their wealth in safe-haven products. 

In 2010, stock markets slowly started to get their color back. And investors began to cautiously open their doors, stepping out into the darkness while muttering "I'm not afraid, I'm not afraid," under their breath.
 
Now it's 2013 and that pretend courage has become real. Here, a recent Wall Street Journal article describes an almost emboldening epidemic affecting the world's market participants known as "fear fatigue" and writes:  
 
"Advisors say they are hearing from investors who had been hunkered down for years but now are feeling more confident that another big meltdown isn't lurking around the corner."
 
The author then provides ample evidence of a global lessening of investor fear via these two key measures:
 
·         The CBOE Volatility Index, known as VIX, has been below 15 every day in 2013, the longest stretch below 15 since early 2007. For perspective, the VIX was at 40 in August 2011.
 
·         And in Europe, yields on the German two-year note have been in positive territory since the start of 2013, the longest rise since June 2012.
 
On paper, the mounting confidence seems well justified. The bear market appears to have gone into hibernation. To wit:
 
·         Germany's DAX Index is within spitting distance of its all-time record high set in July 2007
·         London's FTSE 100 is orbiting a five-year high
·         The Euro Stoxx 600 just reached its loftiest level since 2009
·         And on March 5, the Dow Jones Industrial Average knocked its former 2007 peak off its pedestal
 
So, now that investors have let their guards down, the question is: Is fear fatigue a sign of a reawakening bull market?
 
The answer to that question could not be more relevant to the larger, global economic picture. In fact, the February 2013 European Financial Forecast wastes no time assessing the implications of growing investor confidence. On page one of the ten-page publication, European Financial Forecast presents one of the most powerful pictures of volatility: This chart of the daily percentage swings (daily range divided by the previous day's closes in the Euro Stoxx 600 index) with the dark line representing a 21-moving average of the data and writes:
 
 
 
"There's a lot to discuss this month but let's begin with this remarkable chart that depicts how decidedly quiet -- that is to say, how unvolatile -- the daily stock market is. Throughout the course of the [historical period represented on this chart], only one other time has the Euro Stoxx 600 been less volatile than it is today.... What can it mean that the market is so tranquil now?"
 
The full version of the European Financial Forecast's chart shows the same time period alongside specific political and economic events. Just by looking at the chart now, where do you think the build-up to the 2008-9 financial meltdown falls? Does it coincide with low volatility or high volatility?
 
In European Financial Forecast's evaluation, "Low volatility is the telltale symptom of" one kind of market environment... Everything we see now says that a similar outcome will" occur in European stocks again.
 
 



EFFThe European Financial Forecast gives you an invaluable big-picture outlook for major European bourses to give you an edge over the investing herd.

Each monthly 10-page issue gives you timely, Elliott wave analysis and forecasts of the DAX, FTSE, CAC, Euro Stoxx 50 and more, plus commentary on economic and social trends.

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