You can’t keep the Old World down. That’s the conclusion I’ve come to after seeing the big surge over the past two months in European stocks, and particularly the blue-chip stocks of the Euro Stoxx 50 Index. 

Since falling to its 2014 low Feb. 3, SPDR Euro Stoxx 50 ETF (NYSE: FEZ) powered nearly 12% higher on heavy buying volume before pulling back slightly.

#-ad_banner-#This ETF holds the biggest, and arguably strongest, European companies, including Total (NYSE: TOT), Sanofi (NYSE: SNY), Bayer, Siemens (NYSE: SI) and Banco Santander (NYSE: SAN).

FEZ has been a huge winner over the past 12 months, especially relative to stocks in the S&P 500 index, with a total return of nearly 30%.

These gains are particularly impressive when you consider that just a few years back, European stocks were largely considered toxic. Who could forget all of those sovereign debt default worries, the social unrest and literal riots in the streets in protest over austerity, a sinking euro and the capital flight away from the region’s equity markets?

Well, those things now appear a distant image in the Old World’s rear view mirror. And there looks to be more opportunity for traders to continue riding the momentum in European stocks.

One impressive bullish statistic is the amount of new assets FEZ garnered during the first quarter. As reported by ETFtrends, FEZ pulled in $227.5 million in new assets during the first three months of the year. 

According to Efficient Market Advisors CEO Herb Morgan, this migration is partially due to the fact that stocks in Europe actually represent a better value than stocks here at home. 

“Because Europe is behind the U.S. in the economic recovery, its stocks haven’t risen as much. European equities as a whole are about 32% to 35% cheaper than the U.S.,” Morgan told Investor’s Business Daily. “Looking back over the last 40 years, European stocks have been this cheap relative to the U.S. on 17 occasions. In 80% of those instances, European stocks outperformed the U.S. and produced positive returns 88% of the time.”

Last week’s sell-off in European indices, which was led by those of Spain and Italy, looks to be the result of profit-taking following weaker-than-expected industrial output data in Italy and a drop in Spanish utilities thanks to a discounted placement of shares in electric utility company Iberdrola.

But according to Datastream, Spanish and Italian stocks were trading at the highest valuation versus pan-European stocks since 2006. So a pullback here shouldn’t be too disconcerting — and in fact, offers a better entry point.

FEZ is trading just below its 52-week high. The shares are well above their 200-day moving average, near $39 but not yet too far overextended from their 50-day moving average. 

I suspect that FEZ is about to stage another big rebound, especially if stocks in the U.S. meander during the second quarter. If that happens, we should continue to see the money flows go where the gains are, and that could mean a trip to the eurozone in the second quarter.

Action to Take –>
— Buy FEZ at the market price
— Set stop-loss at $39.40, approximately 8% below recent prices
— Set initial price target at $49.25 for a potential 15% gain in four months

This article was originally published at ProfitableTrading.com: 
This Undervalued Region May be a Much Better Buy Than U.S. Stocks

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