The year-end rally is in full swing. Since October 6, the Dax has risen by more than 1400 points, an increase of around ten percent. Will this upward trend continue? A look at past year-end rallies and other indicators shows that the risk has risen significantly, at least for newcomers.
This year, a well-known prejudice by private investors was once again refuted. It is the expectation that after a successful course in the first ten months of a stock market year such as 2021 there will be no more year-end rally. Exactly the opposite is the case. There are year-end rallies for stocks almost exclusively only in good stock market years. In 2017 and 2019, too, a new annual high in the last two months crowned the overall positive development.
In bad years, on the other hand, the negative performance continues on average into December. There has been such a development in recent years: 2018 is the best example of this. After an overall weak course of the year, the stock market barometer continued to slide in the last few months of the year. In December alone, the minus was more than ten percent. It was one of the weakest final months of a year in the entire history of the DAX.
So does the current record hunt mean that the signs point to further rising prices? In order to answer this question, it is worth taking a closer look at the aforementioned stock market years 2017 and 2019 on behalf of many others. The most important finding: Such year-end rallies are rarely straight.
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In the 2019 stock market year, the starting gun was fired at the beginning of October and the rally was virtually over in mid-November. At the beginning of December, after a slight consolidation of three percent, there was still a small opportunity to enter, but overall it went sideways from mid-November to the end of December.
Getting in now is risky
There was also a year-end rally in the 2017 stock market year, which, similar to 2019, ended at the beginning of November. Four years ago it went down by around five percent by the end of the year. These examples show the risk for those who are just about to try to get into the year-end rally.
So that there is no misunderstanding: There are currently only few signs of a sudden end to the current rally. Investors are euphoric, which is considered a counter-indicator and rather signals falling prices. But such euphoria can last longer than many can imagine.
The meanwhile high investment rate among private investors and international fund managers does not have to mean that a price slide is imminent. The correspondingly low cash quota explains, on the one hand, the rapid increase in recent weeks and, on the other hand, allows the conclusion that there is no longer enough money to continue the rally at this rate.
Such a low cash quota already existed in the summer months of this year. At that time there were constant new record highs, but the leading German index was unable to maintain the new highs at the time. At the same time, the subsequent setbacks were kept within limits. It is quite possible that a similar scenario will repeat itself by the end of the year. That would mean: The Dax may climb new record highs, but the days of big price jumps are over.
Let profits run
Nevertheless, the Dax can now record over 16,500 points in the remaining weeks up to the end of the year. But even if the leading index should still reach the mark of 17,000 points, which is rather unlikely: It would only be an increase of around four percent. Is it worth taking a risk for this?
If you got in a few weeks ago, you should stick with it and let the profits run. But relying heavily on further rising prices now could prove to be a mistake. Perhaps there are still one or two setbacks that are likely to be a buying opportunity in the long term.
This rally can best be compared to a party. Those who join late can still celebrate a bit, but they don’t have the same fun as those who were there from the start. Especially since many of the guests at this party are easily drunk and the mood can quickly change. Then the party is over quickly. And the more you partied, the greater the crowd at the exit, because then everyone wants to go home.
In a figurative sense, this means: if you buy now, you could soon ask yourself whether entering the rally was worthwhile.
More: Twelve stocks that investors can use to invest in the future.