There is no doubt about it now: the German DAX is on a tear. It hasn’t just made a marginally higher all-time high; it has left its 2007 peak some 300 points behind. Nor is the rally idiosyncratic; major bourses across the world have also reached multi-year highs, if not all-time highs. Even if one had harboured doubts about the tenacity of the stock market rally some weeks ago, those doubts ought now to have been put to rest – oughtn’t they? The answer, it seems, is no…
15 May 2013. FRANKFURT (Börse Frankfurt). ‘Stock market rally’, ‘bull market’, or even ‘all-time high’, are all expressions that have long ceased to be reserved for investment professionals. Since the boom in internet stocks in the late 1990s, such references have found their way into dinner party conversations, taxi drivers’ banter, and the background murmur on public transport. Stock market booms not only decorated everyday conversations, it coloured retail stock portfolios too. In fact, amateur stock market commentary became so commonplace over the past two decades that some analysts even try to use it as a contrary indicator for equity performance. The argument goes: if the general public is getting excited, it is time get out…
8 May 2013. FRANKFURT (Börse Frankfurt). Last week (in fact, just four sessions ago due to a German public holiday) sentiment among domestic asset managers on Boerse Frankfurt’s survey panel registered the largest bearish shift in over three years. Since then, the DAX benchmark index not only climbed more than three percent, it also scaled its loftiest level ever. In retrospect, therefore, the sell decision that more than likely preceded this bearish shift was clearly the wrong one. To correct this decision now, at an all-time-high, would mean realising a real or opportunity loss, and expose investors to possible regret in the future if it turns out that the second decision is also the wrong one. This is precisely the situation where two very powerful psychological forces combine to produce inaction. By not making any decision at all, investors assuage their loss aversion by not concretising any losses; they also sidestep any regret aversion by not making any decision that could expose them to any immediate regret. They have done nothing…
Year-low provoked more disquiet than investors let on
2 May 2013. FRANKFURT (Boerse Frankfurt). One of the notable characteristics of the DAX’s corrective decline from the mid-March highs was how little it seemed to influence investor opinion. For most of the past six weeks, the optimism of domestic asset managers on Boerse Frankfurt’s sentiment panel has held above both long-term and year-to-date averages. Indeed, judging by Cognitrend’s Bull/Bear-Index, they were decidedly more flustered when the benchmark index failed to hold on to the 8,000 level after having traded above there for two whole sessions, than they were when it subsequently slumped all the way back to the low-7,400s. We attributed this apparent stoicism to the fact that managers were not overly confident about the future for German stocks in the first place…
Or is German economic weakness bullish for stocks?
24 April 2013. FRANKFURT (Börse Frankfurt). The half-percent week-on-week gain registered on the DAX index at the time of today’s sentiment survey hides some considerable intra-week volatility. Just yesterday alone, the German benchmark surged 2.4 percent, a price move that for some was just as unfathomable as the similar-sized decline that unfolded in the prior week. Some commentators attribute the new-found enthusiasm for German blue-chips to the prospects for an ECB rate cut. Numerous analysts even predict the central bank will finally react to the eurozone’s slow growth and tepid inflation by reducing the refinancing rate by at least 25bp as early as at next week’s meeting. These pundits tend to overlook another essential pre-condition for a rate cut, namely a properly-functioning monetary transmission mechanism. Will, for example, a quarter-point rate cut allow a household in Portugal or a small business in Greece to borrow more cheaply? This much-lamented feature of the post-crisis eurozone has probably been the single reason why has ECB has not moved to cut rates so far…
Let me get my disclosure statement out of the way first: I do not own any gold, nor have I done for quite a few months. I confess to being somewhat biased where the precious metal is concerned. Some might accuse me of smugness in regard to the recent sell-off, but this goes too far. In fact, the recent gold crash has left me feeling very troubled. This is largely because none of the experts seem to have any explanation for the extraordinary selling orgy apart from the usual throwaway arguments.
Investors know better than to catch a falling knife
17 April 2013. FRANKFURT (Börse Frankfurt). Something resembling a German version of the ‘flash crash’ occurred this morning. In the matter of minutes the benchmark DAX plunged some 200 points to (briefly) record a new low for 2013. There was no obvious catalyst, although unconfirmed reports circulated shortly afterwards about rocket attacks in Israel, and about a potential sovereign ratings downgrade for Germany. Neither of these explanations would justify such an abrupt decline in normal times, but these have ceased to be normal times. This was not just any unexplained price slump; this was one that came against a backdrop that appeared very susceptible to sudden price slumps.
A sell decision is never too far from investors’ thoughts
3 April 2013. FRANKFURT (Börse Frankfurt). “If at first you don’t succeed, try, try again,” counselled the US comedian W.C. Fields. “Then quit,” he went on. “There’s no point in being a damn fool about it.” Domestic institutional DAX investors seem to have taken this advice to heart, because after embarking on yet another correctional play on the benchmark index last week, they have already abandoned the effort and bought back the positions.
DAX investors take another stab at a correctional bet
27 March 2013. FRANKFURT (Börse Frankfurt). Even though German institutional investors have expressed a bullish opinion of the blue-chip DAX index every week for almost two full quarters, it would be wrong to describe this optimism as ‘unreserved’. To a large degree, fund managers’ opinions were a pragmatic response to a sizeable pick-up in inflows to their funds during that period. We suspect respondents to Boerse Frankfurt’s sentiment survey have always eyed warily what they see as a widening gap between the blistering performance of the DAX over the past nine months and the relatively sober outlook for the German and eurozone economies…
20 March 2013. FRANKFURT (Börse Frankfurt). If financial journalists had a vote on Boerse Frankfurt’s DAX sentiment panel, optimism would be in the cellar. The controversial levy on Cypriot bank deposits has provided grist for a media mill that has been starved of eurozone crisis news since Draghi’s by-any-means-necessary speech last year. Now, even though asset prices have reacted modestly (one cannot be sure the brief equity declines were due solely to the situation in Cyprus) the press has gone to town…
13 March 2013. FRANKFURT (Börse Frankfurt). ‘Nobody ever died from profit-taking’ was an old market chestnut we heard last week for the first time in at least six months. Certainly, its revival had something to do with the DAX index reaching the 8,000 mark for the first time since 2008. For seasoned investors in German blue-chips this was quite an achievement and an invitation to profit-taking that was difficult to refuse.
As the US equity benchmark, S&P 500, approaches the levels where it peaked in 2000 and in 2007, it feels like open-season for equity analysts predicting a triple-top for the index. I do not want to speculate here about whether we will look back on this point as another historical turning point or whether it will vanish in the blur of a multi-year bull market, yet I do find the sceptics’ reasoning quite revealing.
Institutional investors lost patience with the idea of a correction
6 March 2013. FRANKFURT (Boerse Frankfurt). For more than a month, the DAX had promised to move lower. The market had delivered an impressive, almost one-way performance since last November until the end January of this year and had reached a new multi-year high. For many of the domestic institutional investors on Boerse Frankfurt’s sentiment panel, this was a development worthy of a meaningful correction. However, although February began with a powerful sell-off, there was never any follow-through.
Investors had grappled with the prospect of gridlock two weeks ago
27 February 2013. FRANKFURT (Börse Frankfurt). Investors have eyed the lofty levels of German blue-chips with thinly-veiled incredulity since the start of the year. Admittedly, there had been a marked reduction of tail-risk in the eurozone crisis, which justified lower risk premiums and higher stock prices, but how long would it last?
20 February 2013. FRANKFURT (Börse Frankfurt). On the face of it, German institutional investors have given the domestic equity market a huge vote of confidence. Since last week’s survey there has been a marked bullish swing among members of Boerse Frankfurt’s sentiment panel – so much so that overall optimism, as measured by the Cognitrend Bull/Bear-Index, climbed to the loftiest level of the year.
13 February 2013. FRANKFURT (Börse Frankfurt). A little less than two weeks ago investors took fright in response to the latest developments in the eurozone. Reportedly, their concerns centred on upcoming elections in Italy, a scandal and the prospect of elections in Spain, and a lack of EU agreement about a resolution for Cyprus. All of those things added up to a meaningful risk of a revival of the entire eurozone crisis. We suspect that the unspoken reason for investor nervousness was the German benchmark’s January rally to multi-year highs. However, “too far, too fast” does not carry as much weight in strategy meetings as “political risk in three eurozone countries.” Either way, many members of Boerse Frankfurt’s sentiment panel quit the bullish camp moved into the ‘unchanged’ camp; most of them were former bulls
6 February 2013. FRANKFURT (Börse Frankfurt). Fully nine percent of Boerse Frankfurt’s sentiment panel quit the bullish camp over the past week. And there are no prizes for guessing when this selling took place – Monday. Over that single session the DAX index lost 2.5 percent. Admittedly, it was only by the end of the day the reasons for the weakness in the benchmark were laid bare: an emerging political scandal in Spain had provoked calls for the resignation of Prime Minister Rajoy; and, in Italy, investors watched with reticence a resurgence of popular support for former Premier Berlusconi, thanks in part to budget-blowing electoral pledges.
Overweight for the first time since the start of Q3 2012.
30 January 2013. FRANKFURT (Börse Frankfurt). DAX investors who were hoping for a correction to provide cheaper levels to buy German blue chips have been left wanting. Since Boerse Frankfurt’s last sentiment survey one week ago, stock prices have essentially only gone higher – almost two percent at the last count. This time there were no spurious rumours to spook weaker hands into dumping stocks; those who needed to buy had to pay prices not seen since 2008
There was outcry last week when the German DAX index slumped 100 points in just a few minutes. It subsequently recovered, but not before complaints were made about market manipulation and ‘fat fingers’. An explanation was easy to find on Twitter: apparently, there had been a rumour about the supposed resignation of Bundesbank chief, Jens Weidmann,
A DAX correction was welcome – whatever the reason.
23 January 2013. FRANKFURT (Börse Frankfurt). The DAX index suffered a puzzlingly mid-session setback yesterday. Without any apparent news release or event, it slid 1.5 percent within minutes to the year low. It later emerged that traders had been spooked by an unconfirmed report that German Bundesbank chief, Jens Weidmann, had resigned.
Japan’s decision to prod its central bank into buying unlimited quantities of financial assets using printed money is the latest offensive in the so-called ‘currency wars’. The spoken goal of the policy is lifting inflation, but the unspoken one is that of drowning of the currency.
That Mario Draghi’s name was recently mentioned as a potential Italian prime minister is measure of how much the man is presently revered in politic0-economic circles. His management of the eurozone crisis and, just as importantly, of the ECB’s Governing Council, has rightly earned him high praise – Man of the Year, no less.
16 January 2013. FRANKFURT (Börse Frankfurt). The latest data from EFAMA, the European Fund and Asset Management Association, confirmed this week that inflows into European investment funds accelerated for a second consecutive month in November. Equity products were the clear winners; they attracted double the inflow of fixed-income products – a sharp reversal of the pattern seen earlier in 2012. And these were not just any investors: insurance companies were the major buyers of equity funds. Without knowing it, this is precisely the development we believed had to be behind the sudden shift in sentiment in Boerse Frankfurt’s weekly sentiment survey at the start the third quarter. Although, at the time, fund managers might not have shared the beliefs of these new investors, they were at least smart enough to fight the flow.
“The majority of investors on the panel had been outright bearish during practically all of the third quarter – pessimism of unprecedented duration in the history of this survey. So it is difficult to imagine they would have been able to perform the mental gymnastics necessary to switch from stubborn bear to dyed-in-the-wool bull in the space of seven days.”
“The bulk of the bullishness reflected in the Cognitrend Bull/Bear-Index derives from a large, mostly passive group that adopted this opinion some nine weeks ago and haven’t budged since. This group, we have long suspected, probably recognised a notable uptick in inflows to their respective equity funds and concluded that stock prices were unlikely to fall under those conditions. These institutional investors are unlikely to have overweighted their portfolios immediately, though. One must remember, these same investors had previously spent the entire third quarter clinging to a bearish opinion of unprecedented tenacity. News of an improved cash inflow in Q4 may have been sufficient for them to put this bearishness on hold, but to become immediately bullish would have been the psychological equivalent of jumping through burning hoops…”
“For the vast majority of the institutional investors on the panel there has been no change in vote; we had expected none. This is because the principal factor fuelling this bullishness has never been the index price. Since the start of the quarter when overall optimism, as measured by the Cognitrend Bull/Bear-Index, reversed dramatically from stubbornly bearish to just as obstinately bullish, we have attributed the change to cash inflows to equity funds. The fund managers in the survey might not have been convinced about the persistence of these inflows, or even of its wisdom, but they were smart enough not to fight the flow…”
Optimism doesn’t mean investors are prepared for new DAX highs
28 November 2012. FRANKFURT (Börse Frankfurt). The easiest prediction to be made from last week’s DAX sentiment poll was that the bullishness would not last. This was not because overall optimism, as measured by the Cognitrend Bull/Bear-Index was already at the year’s high, but because one sub-section of the sentiment panel was certain to be very sensitive to any change in prices. As the index rose over two per cent since last week, the move was more than enough to prompt selling…
21 November 2012. FRANKFURT (Börse Frankfurt). At first glance it appears rather benign, the 0.3 per cent week-on-week in the DAX index since last week, but it hides a more than 200-point slide and an even more robust recovery. Observers could easily explain the drop, as there were many things for investors to worry about. To start with there was a resurgence of eurozone worries.