European shares steady, near-term momentum slows

Tue Jan 29, 2013 7:36am EST

* FTSEurofirst 300 flat, Euro STOXX 50 down 0.3 pct
    * RBS, Software AG drag down banks, tech sectors
    * Major stock indexes near "overbought" territory

    By Atul Prakash
    LONDON, Jan 29 (Reuters) - European equities steadied near
two-year highs on Tuesday, with weaker banking and technology
shares offsetting positive sentiment after a strong start to the
earnings season and a brightening economic outlook.
    European banks fell 0.8 percent to top the fallers
list, led by a 4.9 percent drop in Royal Bank of Scotland
 on a Wall Street Journal report that the bank was
nearing a $785 million settlement with U.S. and UK authorities
over claims some of its employees submitted false Libor rates.
    The market also came under pressure from weaker technology
stocks, down 0.6 percent, with Germany's Software AG
 falling 14.5 percent after saying it expected 2013
earnings per share to be down from the previous year.
    At 1214 GMT, the FTSEurofirst 300 index was down
0.02 percent, or 0.20 points, at 1,172.77 after opening higher.
The index is up nearly 24 percent from its June lows, but may
not grind substantially higher in the coming days.
    "We are seeing clients taking a near-term bearish view, with
a large number of them being short either the market or
individual stocks," said Jeremy Steinson, equities derivatives
trader at Killik, adding investors were looking for a pullback
before re-entering the market.
    "We are also currently gaining downside protection via
options, just to hedge out existing long-only portfolios that
have ridden the market up to the current levels."
    Profit takers move in every time the market rallies, but the
FTSEurofirst 300, which climbed to a 23-month high on Monday,
has been gradually gaining on liquidity support from central
banks, improving global economic outlook and robust earnings. 
    Just 6 percent of companies on the STOXX Europe 600 index
 have so far reported fourth-quarter earnings, but 72
percent of them have met or beaten forecasts, according to data
from Thomson Reuters StarMine.
    HSBC noted that retail investors were returning to equities
after four years dominated by outflows, with nine weeks of
inflows suggesting investors were warming up to the asset class
after a six-month rally.
    
    SLOWING MOMENTUM
    Some analysts advised caution.
    "Technicals indicate that developed equity markets are now
overbought and while earnings are beating, we are seeing very
few upgrades following results so far," Jeremy Batstone-Carr,
head of private client research at Charles Stanley. 
    "Our overall sense is that 12-month forward price to
earnings ratios no longer suggest that equities are
cheap. Volumes are faltering and deal size is ebbing, indicating
that the rally is losing power."
    Charts showed the relative strength index (RSI) for the
FTSEurofirst 300 index was at 68, while it was 64 for
the euro zone's blue-chip Euro STOXX 50 index, which
fell 0.3 percent to 2,735.81 points.
    An RSI above 70 is considered as "overbought", which often
results in a retreat for stock indexes. A level below 30 is seen
as "oversold", attracting more buyers.
    The Euro STOXX 50 could face next resistance at around 2,800
points, last tested in July 2011. The medium-term target for the
index is 3,050-3,080 and support is seen at 2,700, the level
where a consolidation started after a rally in January.
    "Its momentum is slowing a little bit after a good move, but
the overall uptrend remains intact. The Euro STOXX 50 is likely
to defend its current levels and might not move much in either
direction in the very near term," Commerzbank technical analyst
Petra von Kerssenbrock said.
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