I found something interesting on the euro zone when I was looking through some charts today. It has to do with the relationship between the euro zone’s biggest strength, Germany, and its biggest weakness, Spain.
I always keep an eye on a ratio chart of these two countries. This is nothing new, I’ve shared it with you before. But just in case you’re new to Survive & Prosper, I’ll explain…
To make my comparison, I chart a Germany ETF (NYSE: EWG) versus a Spain ETF (NYSE: EWP). This ratio tells me which country is relatively stronger and allows me to spot changes in the current trend.
Germany has clearly outperformed Spain for the past three years, as EWG’s value more than doubled against the value of EWJ. This is, of course, no real surprise. After all, Germany has been the sole hope of saving the monetary union.
But I’m more interested in what’s happened over the past two months. Specifically, since September 14 when global equity markets peaked and then sold off for eight straight weeks.
I was expecting to see that Germany held up much better in the downturn than did Spain. But that wasn’t the case.
Here’s the ratio chart I’m looking at.
Germany’s outperformance peaked in late July. From that point, heading into mid-September, Spain gained ground on Germany.
Then September 14 came. I’ve highlighted this date with a blue circle (leftmost). That’s the point where I expected to see the ratio shoot higher, as investors dumped risky Spain shares (EWJ) and hid in the safety of Germany (EWG), until the sell-off ended.
But that didn’t happen. As you can see, the ratio just went sideways. Both Germany and Spain dropped together by about the same magnitude.
This is only interesting because I think it serves as a major warning siren from Germany.
Think about it… it’s quite reasonable to assume the weakest euro zone members will eventually drag Germany down with them. Germany is strong – that’s why it was looked to as the savior – yet it’s not infallible.
It’s seems now that Germany’s strength and outperformance is waning. It’s hard to tell how long Germany can last as the euro zone’s stability. But one thing is clear: when Germany stumbles, the euro zone has NO hope!
If you haven’t done so already read the Survive & Prosper issue on “Black Friday is Now a Retailer’s Nightmare.“