Dusseldorf The Dax significantly limited its daily losses on Friday. At the close of trading, the leading German index was down 0.4 percent at 15,425 points, after having been 1.2 percent down in the meantime.
Worries about interest rates and inflation flared up again and slowed down the German stock market. In view of the high inflation in the USA, investors are expecting the US Federal Reserve to raise interest rates more sharply. On the other hand, strong company balance sheets, such as Mercedes-Benz, provided a ray of hope.
On a weekly basis, the Dax rose by almost 2.2 percent or 325 points. On Thursday, however, it failed to break through three key chart technical moving average lines: the 38-, 100- and 200-day moving averages for the short, intermediate and long-term trends. This may have prompted some investors to sell initially. At least there is now a comfortable buffer between 14,800 and 15,000 points, which is important on the bottom.
At least two hedge funds should have been happy about the historical price slide of more than 30 percent at the Dax member Delivery Hero: According to the data of the Federal Gazette, Citadel Advisors Europe and Canada Pension Plan had bet on falling share prices at the food supplier. With a total of 1.08 percent of all freely tradable titles, their positions were rather small. According to data so far, the two funds maintained their ratios on Thursday.
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These hedge funds, also known as short sellers, bet on falling prices with so-called short sales. To do this, they borrow shares for a fee and sell them in the hope of being able to buy them back at a lower price before the return date. The difference is the profit. If the stock rises unexpectedly, the hedge funds make a loss.
The price losses continued on Friday: the Delivery Hero share closed down 11.8 percent at EUR 41.00. The daily low of 40.29 euros was a little lower – this is the lowest level since mid-2019.
Such sell-offs of stocks or indices almost always end according to the same scheme: The highest trading volume of the session prevails in the area of the lowest price. On Friday, for example, at 10.28 a.m. at a price of EUR 41.10, more than 22,000 shares were bought and sold, by far the highest value in continuous trading. It then went down slightly for a few minutes, but then smaller orders with sometimes only 19 or 30 shares traded ensured that the Delivery Hero share then climbed up again.
Of course, this is no guarantee that the Delivery Hero title will not fall even further in the coming days and weeks. But the worst might be over for now. The staggering total of 22,000 shares suggests that hedge funds reduced their short quota by buying back shares.
Now, of course, the analysts are adjusting their price targets significantly downwards. The British investment bank Barclays has cut its target from 153 to 80 euros, but left the rating at “Overweight”. That would still be double the current price. Bryan Garnier lowered the price target from 160 to 100 euros and replaced the previous buy recommendation with a neutral rating.
Such a slide in prices is unlikely to leave the short seller market unscathed in the coming days. Hedge funds are focusing on all stocks that may find it more difficult to break even in an environment of rising interest rates.
High short rate at Home 24
One stock that short sellers have been targeting for some time is the online furniture retailer Home 24. According to data from the Federal Gazette, the so-called short sale rate is 9.78 percent (as of Wednesday, February 9). Values below 0.5 percent are not taken into account.
Company metrics meet some hedge fund conditions. The loss per share is getting smaller every year, but was recently still minus 0.61 percent. In addition, Home 24 recently took over the Butlers chain of stores with 130 branches in eleven countries.
The interesting thing is that the short sale rate is still at a high level, even though the stock has already slipped almost 60 percent in the past twelve months. The fact that the short sellers are still not closing their positions and taking profits, but are instead counting on falling prices, is not a good sign for the shares.
“Restructuring cases and overvalued stocks in particular are shorted,” Volker Brühl, Managing Director of the Center for Financial Studies at Frankfurt’s Goethe University, observed three weeks ago.
On the other hand, the high short rates offer short-term upside potential. Because it could be difficult for the hedge funds to buy back the borrowed shares in a way that protects the price. Almost eleven times as many shares are shorted on Home24 as are traded on Xetra and Tradegate on average.
For private investors who hold these shares, this means that even if the short sale rate in the Federal Gazette is only published a day late, they can use the high trading volume to estimate when the massive share buyback by hedge funds is likely to end. There could be an exit opportunity for them.
Look at other individual values
Mercedes Benz: A gain above market expectations encouraged investors to buy. The carmaker’s shares rose by 6.7 percent and were leaders in the Dax.
Fresenius Medical Care: A negative analyst comment sent the shares plummeting. The shares of the dialysis specialist fell by 2.3 percent to 57.70 euros. The experts at the investment bank Jefferies downgraded the title to “underperform” and lowered the price target to 53 from 56 euros.
Carl Zeiss Meditec: Investors responded to the company’s numbers with sales. The shares of the medical technology company fell by 3.3 percent. One stockbroker criticized that sales and profit margins had clearly missed market expectations. “The only glimmer of hope is the incoming orders.”
Instone: A planned EUR 50 million share buyback will lift the stock to the top of the SDax. The real estate company’s shares rose 5.7 percent.
Here you can go to the page with the Dax course, here you can find the current tops & flops in the Dax.