Reining in Europe's Runaway Markets

Our friends in Europe love a good party.

But who can blame them? Especially since they just endured a rotten couple years filled with near-meltdown conditions.

I’ve stumbled onto countless concerns about the speed with which domestic markets lifted off to start the year. But if you think the S&P climbed too quickly — check out Italy and Spain. After posting modest gains during the first week of the new year, both these markets exploded to the upside, quickly outpacing the S&P.

But as you can see, both Italian and Spanish shares are rolling over a bit. It looks like that Jan. 1 hangover showed up a little late this year…

Spain and Italy iShares vs. S&P 500 SPDR

Both pullbacks are abrupt — but completely necessary. Using the Italy iShares as a proxy, I’m seeing a retreat from the highest overbought levels since 2009. Ditto for Spain.

But before you put on your bear suit, I offer a quick word of warning:

Despite these sharp pullbacks, Italy and Spain have some very nice-looking charts. Big volume. Clear bottoms forming. They could end up having a fantastic year.

Right now, we’ll have to see when and where buyers step in and stop the bleeding. If the consolidation becomes more orderly, you could be looking at a couple of solid buying opportunities.

Greg Guenthner
for The Daily Reckoning