There is a high probability that the stock market rally will continue.
The proverb often attributed to the American poet Mark Twain also applies to the markets: “History does not repeat itself, but it rhymes.” This means that recurring events ensure similar, but never the same reactions in the markets. From this, the bold forecast can currently be derived: The probability of a continuation of the rally on the stock markets is high. And in contrast to the start of the year, the US stock exchanges are likely to rise more than the Dax.
To understand that, you have to take a look at the situation in December last year. At that time, professional investors believed in a weak first half of the year and a subsequent recovery. Domestic investors were prepared for consolidation, but not for a vigorous upward trend.
In mid-December, the international fund managers were still underweight shares in the euro zone, despite a brilliant Dax rally since the end of September. But then the Dax had the best start to the year ever, and prices on the US stock exchanges also rose, albeit more slowly than in Europe.
The Dax also maintained this distance on Wednesday. At the end of trading, the leading index was just under 0.1 percent up at 15,216 points. The Dax has apparently ended its first major setback this year with a minus of eight percent in the wake of the banking turmoil. The chances of further recovery are not bad.
The current mood is similar to that before the banking turmoil. The cash ratio is over five percent, as it has been for 15 months. This is the longest period of above-average cash holdings since the dot-com bubble burst at the turn of the millennium. At the same time, investor sentiment has fallen back near 20-year lows and US stocks have become less popular versus European stocks.
Crash on global stock markets unlikely
There can hardly be better news for the stock markets. The US interest rate decision may weigh on the markets in the short term. But a crash on the global stock markets is very unlikely due to the bad mood. The logic behind this seemingly absurd argument is that the worse the mood, the more investors have already sold their shares and the fewer potential sellers remain.
The list of other signals that speak for rising prices on Wall Street is long. The mood among US private investors is also bad. According to the latest sentiment survey by the American Association of Individual Investors (AAII), the proportion of optimists is only 19.2 percent.
Jörg Scherer, Head of Technical Analysis at HSBC Germany, knows from experience: “Values below 20 percent indicate extreme skepticism and often mark lower turning points” for the stock market. True to the motto: “If everyone is pessimistic, the mood can only get better.”
The charts of the major US indices also speak for an upswing. All three major stock market barometers – the Dow Jones, Nasdaq and S&P 500 – have climbed back above the 200-day moving average, a technical level that is particularly watched by long-term investors. If this trend continues, international fund managers will have to buy. In contrast to private investors, professionals cannot stand idly by when prices rise and the performance of their managed portfolio lags behind.
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