French index trade idea

The French equity market looks good both from a valuation and technical perspective.

Source: Bloomberg

On the weekly chart, the France 40 cash has held the 200-week moving average nicely (as you can see from the chart). This average comes in some 13% lower than current levels so it’s unlikely we will see this come into play soon, but as long as the market is above this average then a bullish bias should be held.

With the market now getting very excited about QE from the ECB next year, European equities are looking very compelling indeed. I am bullish on the DAX, but thought it worth looking at the French market as well. As we have seen with the FTSE 100 and S&P 500 over the years, an equity index tends to have a strong correlation with the central bank’s balance sheet, so given the ECB are going to try and expand theirs by around €1 trillion over the next two years, this should naturally help European markets.

Valuation-wise the market trades on 13.6 times forward earnings, which is a reasonable premium to its multi-year average, but is still a good discount to that of other developed markets like the S&P 500. The internals are also interesting, with only 57% of companies trading above the 200-day moving average. Bear in mind when the index sold off in September, 70% of companies were above this longer-term average, while in June 93% were. So, while we have seen a strong rally from the October lows, the internals suggest the move has not been fully applied to all companies.

Technically, I would be looking at taking a small position to the index on a weekly close above the year’s downtrend at 4,420 and would be a adding to the position on a subsequent weekly close above the September and June highs (at 4,509 and 4,599 respectively). The idea here is to limit the exposure at the start and, if the trade looks like it is working, then I want to do more of it.

My longer-term target is 4,753, which represents the 61.8% retracement of the 2007 to 2009 sell-off. If we look at the oscillators, the MACD has just achieved a bullish crossover by moving above the signal line, while the stochastic indicator is moving higher again and looking to print a higher high.

Given I am looking at the weekly chart, this is a longer-term trade and thus patience is required. I would look to exit the trade on a close below 4200.

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