Europe

Sentiment toward the eurozone has improved in the past week as the government in Portugal avoided a breakup, Greece got its bailout money and the European Central Bank began sounding an increasingly dovish, simulative tone. The ECB's latest strategy has been to extend its interest rate guidance, promising to keep rates lower for longer.

The evidence is building that Europe's 17-month contraction is ending as the Markit Eurozone Composite Purchasing Managers Index starts to move toward growth again (a PMI reading greater than 50 indicates month-over-month growth in both the services and manufacturing areas of the economy). Ireland's economy has returned to growth and is expanding at its best rate in five months. Germany is at a three-month high; Spain is at a two-year high; France is at a 10-month high; Italy is at a 21-month high.

In fact, as the chart below shows, Spain could actually be on the verge of exiting its recession.

Spain

How to play it

While the global economy is showing signs of improvement, the stock market is also showing positive signs. Breadth is widening as more and more stocks participate in the new uptrend. Traders in the options market are increasingly betting on higher stock prices. And more and more stocks are hitting new highs rather than lows as the New York Stock Exchange recovers.

Market Vector Oil Services

Energy stocks are among the strongest performers right now as crude oil flirts with $104 a barrel. I've added the Market Vectors Oil Services (OIH) exchange-traded fund, Schlumberger (SLB) and National Oilwell Varco (NOV) to my Edge Letter Sample Portfolio.

I've also added the ProShares UltraShort Euro (EUO) ETF to take advantage of the ECB talking down the euro.

Watch the exit

I don't know how long these tail winds will last. Rates on 10-year Treasury notes are already up from a low of around 1.7% in early May to 2.7% now, as investors respond to a likely "tapering" of the Fed's $85-billion-a-month bond-purchase stimulus program expected in September.

It's an open question whether the economy can handle a 60% increase in the price of money, which is what that bond move amounts to, in just two months. It's also an open question whether the stock market can handle the beginning of the end of the Fed's open-ended "QE3" stimulus program or the recent rise in crude oil.

Image: Anthony Mirhaydari - MSN Money

Anthony Mirhaydari

For months, I've been warning that investors weren't discounting some very real warning signs. Through April and May, the economic data were consistently disappointing. Europe was succumbing to a deepening recession. Japan was being roiled by bond market volatility. And here at home, everyone was just awakening to the fact borrowing costs are, in fact, headed higher.

Long-term risks remain, but for now, the market has absorbed those risks. And with the major stock averages breaking out of a multimonth downtrend pattern and sentiment so washed out, there is evidence that some guarded optimism is warranted, given the improvement in the economic data. That gives us reason to be constructive on stocks over the near term.

In short, if the pullback is really over, the next move is up.

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At the time of publication, Anthony Mirhaydari did not own shares of any company or fund mentioned in this column in his personal portfolio. He has recommended OIH, NOV, and EUO to his clients.

Be sure to check out Anthony's new money management service, Mirhaydari Capital Management, and his investment newsletter, the Edge. A free, two-week trial subscription to the newsletter has been extended to MSN Money readers. Click here to sign up. Mirhaydari can be contacted at anthony@edgeletter.com and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.