Trading Nation

Trader explains the ‘uber-bullish scenario’ everyone is missing

When Europe outperforms the U.S., here’s what comes next

As one benchmark European stock market makes new highs, one technical analyst senses a prime opportunity — in the United States.

The Euro Stoxx 50 is trading near its highest levels in a little over a year, hitting what Oppenheimer technical analyst Ari Wald called a level of resistance at 3,500. And at these levels, Wald sees the tactical trade as taking profits and rotating into U.S. stocks.

"Over the last 10 years it's been rewarding to rotate into the US after similar bouts of Europe outperformance," Wald wrote in a recent note to clients. He said this is a particularly good time to buy into Europe, since the market is coming off one of its best six-month stretches relative to the in the last decade.

And if Europe is outperforming as it's done this year, it's historically likely that U.S. stocks will follow suit, Wald said .

"We've found it is very rare for Europe to outperform in a falling S&P 500 absolute tape. So generally, a bet on Europe is a bet, really, on U.S. and global equities as a whole. I think this is really the uber-bullish scenario people aren't talking about: Europe continues to lead the way, S&P 500 is going much higher with it," Wald said Monday on CNBC's "Trading Nation."

"Just from a risk/reward basis, we do have some preference for the S&P 500," he added.

To be sure, Wald does not see any "meaningful sell signals aside from being near-term overbought" in the European stocks, which he says are seeing a near-term bounce amid a longer-term relative downtrend.

The Euro Stoxx 50, which contains 50 names across 11 countries in the euro zone — including Germany, Ireland, Italy and the Netherlands — has gained over 5 percent this year even as geopolitical uncertainty mounts across Europe, particularly as this month's French election heats up. The financial sector is most heavily represented in the index, followed by industrials.

Eddy Elfenbein of the Crossing Wall Street blog says that after poor relative performance, Europe is the more attractive pick.

"Right now, I'm willing to stick with the European stocks. You look at a lot of these blue-chip European stocks, you're seeing [dividend] yields of 3 percent, 4 percent. … The spread is in their favor," Elfenbein said Monday on CNBC's "Trading Nation."