Bad sentiment could prevent new lows

Dusseldorf The leading German index confirms its recent recovery and rises above 13,000 points at the start of the week. But many private investors do not trust the development, as the Handelsblatt survey Dax sentiment shows. The mood among the more than 7,000 participants remains oppressively bad with a value of minus 6.2 and is negative for the 28th week in a row.

According to sentiment expert Stephan Heibel, who evaluates the weekly survey, a fundamental problem for investors is: “The bear market simply does not give investors the opportunity to part with unwelcome positions at acceptable prices.” Prices have been falling with brief interruptions since the beginning of the year , Counter-movements were quickly stopped.

The last longer move higher came during the bear market rally in May, when the Dax rose to 14,709 points. Since then, there have never been more than three winning days in a row. “It’s a nerve-wracking market phase with more and more bad news that makes it appear possible that the stock markets will slide further to new lows at any time,” says Heibel.

On the other hand, the extremely bad mood among investors also has a supportive effect on prices. When the mood is already down, bad news no longer has such a strong impact on prices, explains Heibel: “Many investors then say: ‘I knew it.’ Expectations include high inflation figures. Weak quarterly figures are also already priced in.”

This is also supported by the five-week average of sentiment. This has fallen further this week from the extreme value of minus 30 in the previous week to now minus 31. It is thus approaching the historical extreme value of minus 32 in the corona crash. “In the past, this indicator in particular was a reliable indicator of a stable soil,” says Heibel.

However, another risk factor awaits the markets with the topic of gas supply. Maintenance work on the Nord Stream 1 pipeline is scheduled to end this Thursday. However, it is unclear whether gas deliveries from Russia will then be resumed in full – as is the impact on the stock market.

“In the last few decades we have not had any supply problems. It is therefore difficult for investors to imagine such a situation – no matter how large the shadow cast by this threat already is,” says Heibel.

At the same time, the managing director of the analysis company AnimusX reminds that investors have to differentiate between Europe and the rest of the world when it comes to gas supply: “The gas that is missing here is now available in abundance elsewhere. In the US, the disruption at the largest gas liquefaction plant in June resulted in a gas surplus and a falling gas price. Energy-intensive industries are currently benefiting from the situation in the USA.”

Great uncertainty among private investors

Heibel sees another uncertainty factor in the corona situation in China. There are more corona cases again, the government is reacting to this in accordance with its no-Covid policy by quarantining entire blocks of flats or districts. “It is currently completely uncertain how far the tightening will go and what effect it will have,” says Heibel.

This is also reflected in the survey results. The uncertainty remains high with a value of minus 5.7.

At the moment, investors lack the belief in rising prices. Less than one in five respondents believe that the Dax will be on an upward trend in three months. More than half, on the other hand, expect prices to fall or the stock market to bottom out. As a result, expectations have fallen to a value of 1.3. This is the second lowest value in over a year.

Against this background, it is surprising that the willingness to invest remains stable at 1.7 and is only slightly down on the previous week. “This also includes investors who want to short the market, i.e. speculate on falling prices,” says Heibel. In fact, fewer than one in four respondents want to buy shares.

This pessimism is also visible in the Euwax sentiment of the Stuttgart Stock Exchange, where private investors trade. Sentiment has fallen significantly for the second week in a row. Two weeks ago it was twelve, but it has now reached a value of two.

The following applies: the larger the value, the greater the surplus of call options, with which one profits from rising prices, compared to the proportion of put products, the value of which increases when prices fall. “The speculation on a recovery was obviously ended very quickly,” explains Heibel.

Professionals who hedge through European derivatives exchange Eurex have also increased their hedging positions. The put/call ratio is 3.8, well above the average of 1.8. More and more put protection is therefore being bought.

US professional investors reduce hedges

The situation in the USA is different. The put/call ratio of the largest US futures exchange CBOE in Chicago has slipped further. “In the US, investors are obviously dissolving their hedges,” says Heibel. This also fits with the observation of the analysis house S3 Partners that only a few new short positions on US ETFs are opened. These are seen by professional investors as a classic safeguard against market turbulence.

However, the investment ratio of US fund investors remains at a historically low level of 27 percent, observes Heibel: “Fund managers are usually 80 percent invested, but currently 73 percent cash is held as a precaution.”

US retail investors also remain cautious, as shown by the ratio between optimists (bulls) and pessimists (bears). 46 percent of private investors are currently assigned to the bear camp, only 27 percent to the bull camp. The bull-bear ratio is just under minus 20 percent.

Other asset classes

• The euro continued to fall against the dollar last week, hitting a 20-year low at $0.9950 per euro. “The mood on the foreign exchange market is correspondingly negative,” says Heibel. “Investor despondency and uncertainty are at extremely negative levels. Bears are dominating events, and hardly anyone believes in a significant recovery. This is actually a good prerequisite for rising prices.”
• The mood on the gold market has also dropped to an extremely negative level. In the previous week, the gold price per troy ounce reached a new low for the year. “The price drop has obviously caught many investors on the wrong foot. Gold can only be used as a safe haven in the second phase of a correction. Now would probably be a good time to buy gold,” says Heibel.

There are two assumptions behind surveys such as the Dax sentiment with more than 7000 participants: If many investors are optimistic, they have already invested. Then only a few are left who could still buy and thus drive prices up. Conversely, if investors are pessimistic, the majority of them have not invested. Then only a few can sell and thus depress the courses.

Do you want to take part in the survey? Then let yourself be automatically informed about the start of the sentiment survey and register for the Dax sentiment newsletter. The survey starts every Friday morning and ends on Sunday afternoon.

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