Trade idea: Long Eurostoxx 50
We believe that the current bullish sentiment can continue in the short term so we suggest to take a long position in the risky assets that have been underperforming during the recent weeks and that did not break out their recent highs. Scanning the markets we see that this description applies well to the EUROSTOXX 50 future (mar13) now trading at 2723. We believe that the future will break out the resistence set by the former high (2750). Reached the level of 2770 (or after one week) we suggest to swap this trade to a spread made by a Long S&P 500 short Eurostoxx 50. We suggest to overweight the S&P 500 as it is less volatile (suggestion w=1,25). Indeed we analyzed the p/e forward ratio for both indices and we compare it to the level of July 2011 just before the European debt crisis. We believe that investors risk aversion has come back to the level of those days so we believe that the comparison is meaningful. Looking at the data we see that the US Index is overvalued just by 6% while the Eurostoxx by 23%. So in the medium term we think the former will outperform the latter. Moreover, turning a naked long position into a spread is safer as we are not sure that the current rally will continue in the long-medium term. We suggest to turn this trade into the spread outlined above either at the take profit level or a retrenchment equal to 1.1% meaning that we are not in rally any more.
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