How the SX7P Could Help You Make a Bundle In 2012

After a few weeks of relative quiet from Europe during the holiday season, things are starting to heat back up in the region. This week will see a return of various leaders’ summits in Europe, with meetings scheduled between German Chancellor Angela Merkel, French President Nicolas Sarkozy, and new Italian Prime Minister Mario Monti.

Additionally, tomorrow we’ll have a European Central Bank meeting.

As of this writing, there is nothing new or substantial expected to emerge from any of these meetings this week. You can expect more rhetoric about enacting measures to fight the crisis, and discussion of ways to stimulate the euro-zone economy.

These relatively low expectations notwithstanding, the resumption of leaders’ summits and ECB meetings in the New Year will undoubtedly bring more of the headline watching that defined market movements during the fourth quarter of 2011.

With that context in mind, one of the bigger challenges of this first quarter will be trying to discern which headlines are indeed material to the direction of the market, and which are simply not very important. There was a time when you could rely on the market itself to help us know which headlines were meaningful. But as last year showed, this market is simply too volatile to be relied upon as a strong, shorter term indicator.

Instead, I suggest you keep an eye on the STOXX Europe 600 Bank Index (symbol SX7P), one of the most comprehensive European banking indices.

European banks are now the leading edge of the crisis — and not just of the growing banking crisis, but also of the sovereign debt crisis. That’s because European banks would be hurt the most should a sovereign like Greece default.

And this index has tended to be a leading indicator for the overall market since the crisis truly intensified last summer — tumbling 32 percent since June 30. And, in a somewhat ominous signal, the index is already down more than 6 percent so far in 2012.

Unlike the broad markets, which seem to be nothing short of schizophrenic, rallying sharply on one headline, crashing on another, this index will provide insight into the true state and direction of the euro-zone crisis. And it can help you look beyond short-term market action and the latest headlines, allowing you to better time your trading and investing decisions.

Best wishes,

Tom