Italy Stock Market Primed to Soar in the Draghi Asset Bubble
Stock-Markets / European Stock Markets Sep 09, 2014 - 06:21 AM GMTBy: DailyWealth
Brett Eversole writes: The Draghi Asset Bubble is here...
As regular DailyWealth readers know, we've been telling you about the opportunity in European stocks for more than two years... and about what my colleague Steve Sjuggerud has coined the "Draghi Asset Bubble" since last December.
In short, European Central Bank President Mario Draghi is cutting interest rates across the board. He also just announced plans to buy private-sector assets... a similar plan to the massive quantitative easing (QE) we've seen in the U.S.
All of this points to one thing... higher European stock prices.
But there's one European country that looks especially attractive to us right now...
This country has a rare, but profitable setup in place today. And history shows it'll likely lead to a quick double-digit bounce in prices.
Let me explain...
The big winner in Europe could be Italy...
That might surprise you. After all, Italy has been one of the weaker European economies since the 2008-2009 global financial crisis.
The country posted -0.3% gross domestic product (GDP) in the second quarter... its 11th negative reading in a row.
But bad headlines and a weak economy are actually a good thing today. The reason is simple... the bad news has forced investors out. No one is interested. And based on history, that gives us a safe opportunity to profit.
We can see this negative sentiment by looking at the shares outstanding of the major Italy exchange-traded fund (ETF) – the iShares MSCI Italy Fund (EWI).
Exchange-traded funds like EWI create and liquidate shares based on demand. The total shares outstanding fluctuate depending on whether more investors are buying or selling.
When shares outstanding fall, it means investors aren't interested. And that's exactly what we're seeing today...
Shares outstanding of EWI are down 20% over the last month... Historically, that gives us a great chance to profit.
You see, 20%-plus falls in shares outstanding don't happen often. In the case of EWI, it has only occurred four other times since 2010. And buying after these declines led to quick gains. Take a look...
As you can see, buying after a 20%-plus fall in EWI shares outstanding led to 13% gains over the next 2.6 months, on average.
Shares of EWI crashed nearly 20% in June and July, sparking this massive shares-outstanding decline. But EWI is already recovering. The fund is up 8% in the last few weeks. But shares outstanding haven't turned around yet.
That shows that we still have plenty of upside left... And we have what could be a new uptrend on our side. But it's a little too early to tell.
Mario Draghi is doing everything he can to boost stock prices in Europe. With investors fleeing, but prices beginning to move higher, history shows Italy could be the big winner.
It's a bet worth considering today.
Good investing,
Brett Eversole
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