Why European stocks could be a canary in a coal mine

Equity markets in the U.S. are on the road to recovering post-correction losses, but European stocks may be set to stall out, according to a recent Oppenheimer report.

The Euro Stoxx 50 index — composed primarily of blue-chip names in major Eurozone markets such as Germany, France and Italy — has shown significant weakness lately and will likely continue underperforming the S&P 500, according to Ari Wald, Oppenheimer's head of technical analysis.

At this juncture, the index could prove to be a sort of canary in a coal mine, he told CNBC's "Trading Nation." Here are his reasons.

• European markets are increasingly a potential warning for the overall global equity cycle. In other words, major European stock markets' relative underperformance could be the weakness showing its head before other markets follow suit.

• Broadening global participation has been central to Oppenheimer's positive outlook, given the evidence that around major market tops, typically at least one major market average begins to break down ahead of the others.

• In early February, the Europe Stoxx 50 index broke through its 200-day moving average and hasn't been able to recapture that level in the following weeks.

• If this weakness continues, it would put the firm's overall bullish view in question. Wald and his firm believe it's too early to make such a call, because typically these divergences could take months to develop. At the least this weakness confirms Oppenheimer's recommendation to go overweight U.S. equities versus European equities from a portfolio standpoint.

Bottom line: European stocks are set to underperform U.S. equity markets, according to Oppenheimer, and could point to broad global equity market trouble.

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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