For Investors in Europe, the Glass Is Half Full 

(Bloomberg) -- There was no shortage of “sell in May” advices at the beginning of the month, especially after European equities had rallied as much as 30% from their March intraday lows. The market turned out to be surprisingly resilient even as earnings estimates tumbled, macro indicators fell off a cliff and tensions between China and the U.S. resurfaced. Investors want to see the glass half full.

While the market has been stuck in a range since the end of April, it hasn’t been all quiet: the Euro Stoxx 50 future saw a drawdown of 6.5% before rallying almost 10% from the month’s low, signaling that a lot of investors are eager to buy the dips.

Looking at charts, the market tested the higher and lower bands of its range on various occasions in the past month but neither the bulls nor the bears managed to gain any real momentum for a convincing breakout.

Given the dark macro and micro environments, it seems rather astonishing that some investor optimism has prevailed, preventing another leg down for stocks. This is mostly thanks to hopes of seeing a relatively smooth transition out of lockdowns without fresh spikes in infection cases, as well as on the potential for good news on the vaccine front.

There is currently a tendency in the market to “exacerbate any news supporting the bullish trend” says Pierre Veyret at technical analyst at ActivTrades. “This is a dangerous situation that could lead to sharp downside market moves before the summer if both future virus and macro data don’t match investors’ expectations,” he warns.

The put-call ratio in Euro Stoxx 50 options remains near the April low, implying investors might not feel the need to buy much downside protection at this point.

Beneath the surface however, there’s still a feeling of caution. Most asset managers have a bias toward quality stocks, with sectors like technology, health care, financial services and telecoms all in the green this month, while banks, airlines and auto stocks are seeing no love at all.

The picture in terms of countries is also striking. Germany’s DAX Index and the Swiss Market Index are strongly outperforming -- both have reversed more than 50% of their plunge in the first quarter -- while Italy’s FTSE MIB Index and Spain’s IBEX 35 Index have been struggling. Madrid’s benchmark has barely retraced a quarter of its drop.

The reason for the lack of strong rebound in these two markets is mostly due to the weight of troubled sectors like banks and tourism, as well as Spain’s exposure to Latin America, where the pandemic is far from under control.

But what does it tell us? The cautious positioning might have consequences for both market directions, in fact. On the one hand, it could limit any pullbacks from here, as quality stocks may only be dumped if macro data strongly deteriorate from here. And on the upside, the lack of market breadth so far in the recovery from March lows could actually mean a bigger upside potential if things improve on the pandemic front.

“Overall neutral but still searching for opportunities” is how Salman Baig, multi asset portfolio manager at Unigestion, sums it up.

©2020 Bloomberg L.P.