Dusseldorf The German stock market is currently unable to follow the US stock exchanges: while the leading German index Dax has entered another sideways phase around the 16,000 point mark, the market-wide US index S&P 500 has reached an annual high. The market mood (sentiment) on both sides of the Atlantic is correspondingly different.
As the Handelsblatt survey Dax sentiment among more than 8,000 private investors shows, the mood in Germany is neutral, with expectations becoming more negative, observes sentiment expert Stephan Heibel. He evaluates the weekly survey and supplements it with other indicators – and these show that the mood in the USA is almost euphoric. This discrepancy has its pitfalls.
In Germany, Heibel sees two possible reasons for the comparatively bad mood: firstly, the weaker economic data from China. They suggest that the hoped-for economic recovery in China after the end of the Covid restrictions is slower than expected.
Heibel sees the monetary policy of the European Central Bank (ECB) as a second possible factor. “It may be that the fear of the next interest rate hike by the ECB next Thursday weighs on investors’ buying mood,” speculates the managing director of the analysis company AnimusX.
As a result, investor sentiment fell from 1.0 to 0.1 points. The group of those who currently see the Dax in an upward trend has shrunk by 13 percentage points, while the group of those who see the Frankfurt stock market barometer in a sideways phase has risen by twelve percentage points. The basic mood can therefore be classified as neutral.
Complacency, meanwhile, has risen from minus 0.6 to plus 0.1. The majority of investors therefore expected the moderate weekly loss of 0.7 percent in the Dax. “Investors see the weekly development as a long-overdue breather, which fortunately is at a high level,” says Heibel.
However, the survey participants are becoming more pessimistic: Expectations for the future have fallen further, from minus 1.9 to minus 2.2 points. Only around one in five expects prices to rise in three months.
Accordingly, the willingness to invest has also fallen, from 0.6 to 0.0 points. “Investors currently see no reason to take new positions,” observes Heibel.
In keeping with the pessimistic expectations for the future, private investors are also expanding their hedging positions.
The Euwax sentiment of the Stuttgart Stock Exchange, where private investors trade, has fallen to minus four. This means that investors tend to assume that prices will fall and accordingly buy more call options, which increase in value when prices fall.
Dax hedged down
Basically, Heibel sees the Dax in a good position due to the pessimistic future expectations and the expanded hedging positions. Because a basic assumption of sentiment theory is that investor sentiment is a contraindicator.
If investors are pessimistic, the majority of them have not invested. Then only a few can sell and thus depress the courses. And when they build hedging positions, they prepare for falling prices.
“The strong pessimism in Germany forms a safety net under the Dax, should there be another setback,” explains Heibel. In the event of slight developments, this network should also hold up, he believes: “And the longer the Dax can remain at the current level, the more investors will feel pressure to build up positions so as not to miss a possible upward breakout.”
In the event of a change in mood in the USA, however, the Dax could also fall significantly, warns Heibel: “We know that the Dax mainly follows its big brother from the USA, the S&P 500. Should the US markets collapse, German investors will hardly be able to prevent the Dax from slipping.”
Market sentiment in the US is extreme
At the moment, however, there are no concrete indications of a price collapse in the USA in the near future – the S&P 500 has even just entered a bull market, i.e. a phase that promises prices to continue rising.
Heibel has identified the AI revolution and the associated rally of companies that are indirectly or possibly affected as course drivers, as well as hopes for an end to interest rate hikes in the USA and a rapprochement between China and the USA on geopolitical issues.
However, the sentiment expert sees a warning signal in the extremely good investor mood in the USA:
- On the CBOE derivatives exchange in Chicago, the ratio between the traded put options, which investors use to hedge themselves, and the traded call options, which investors use to benefit from rising prices, is in the neutral range. “US investors see little reason to buy hedging positions,” summarizes Heibel.
- US fund managers have raised their investment quota from 54 to 90 percent. The professionals have not been so heavily invested since the outbreak of war.
- The proportion of bulls, i.e. optimistic investors, is 44.5 percent, the highest it has been in a year. As a result, the difference between the share of bulls in the market and the share of pessimistic bears has jumped from minus eight to plus 20 percentage points.
- The S&P 500’s technical “fear and greed indicator” already shows extreme greed for US investors with a reading of 78 percent. The technical indicator “Short-Range Oscillator”, which fluctuates much faster, also points to an overbought state of the market.
Here, too, sentiment acts as a counter-indicator: if many investors are optimistic, they have already invested. Then only a few are left who can still buy and thus drive the courses up further.
Against the background of the contradictory signals from Germany and the USA, there is no “convincing action” for investors from Heibel’s point of view. The publisher of the market letter “Heibel-Ticker” therefore recommends: “I would wait until the mood is a little clearer again.”
Do you want to take part in the survey? Then let yourself be informed automatically 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.
More: Investors make these ten mistakes from the point of view of stock market psychologists