Dusseldorf The mood typical of an intact bull market can be seen on the German stock market. Investors look in disbelief at the high prices and list the arguments that should actually cause a crash: inflation, recession, war. But instead things are looking up. The Dax has reached a new high every week since the end of March.
There is a suitable stock market proverb for such a development: The Dax rises on the “wall of worry”.
This is clearly shown by the evaluation of the current Handelsblatt survey Dax sentiment. At the time of the survey, the Dax was close to its high for the year and only around two percent below the record high. Nevertheless, the mood is only cautiously positive, there is no sign of genuine joy or even euphoria because there are so many concerns about future developments.
For the sentiment expert Stephan Heibel, who evaluates the weekly survey, the situation on the German stock market generally looks “pretty bullish”. In his opinion, investors overlook the fact that these dramatically poor conditions have been known for weeks, if not months.
Therefore, these problems are already priced into the current price level. “The stock markets are now reacting to changes in these framework conditions,” says Heibel. There are enough concrete examples of this.
New interest in buying when conditions change
Key interest rates have been rising for many months. What if this week’s central bank meetings promise an end to US interest rate hikes or if the European Central Bank (ECB) signals a slowdown from the hitherto high pace of interest rate hikes in the euro zone? That would be a classic change. “With such a report, the Dax could climb to a new all-time high within a few days,” says Heibel.
Or what would happen if China’s efforts in Russia’s war of aggression against Ukraine at least lead to talks between the warring factions? What if the expected recession turns out to be just an economic slowdown and growth actually picks up again from the second half of the year?
“While the war, a recession and high inflation are already priced into the current price level, the changes mentioned could be seen as a positive surprise and spark new interest in buying,” explains the sentiment expert.
What would have to happen for prices to fall? Against the background of the currently extremely pessimistic expectations, it is difficult to imagine a negative surprise unless a so-called “black swan” occurs, an unforeseeable negative event. Sentiment analysis can never rule that out.
“But such a black swan is very rare, I wouldn’t bet on it,” explains Heibel. As in the weeks before, investors are better prepared for falling prices than for rising prices.
As a result, price setbacks should remain limited, as seen last week. Price increases, on the other hand, have the potential to trigger further buying. The result would be a run to new highs.
A week ago, the sentiment expert recommended: “Moderate price losses in the coming days are more of an opportunity to buy more than a harbinger of a crash.” 15,922 points in Friday’s trading.
Current survey data
Investor sentiment fell slightly to 1.0 from 1.4 a week ago – an amazing development overall.
Complacency is neutral at 0.3 points. One would expect investors to be smugly patting themselves on the back this close to all-time highs. But there is no sign of that, on the contrary: There are great doubts as to whether these high prices can be trusted at all.
The doubts are even greater when it comes to future expectations, which continue to show extreme pessimism with a value of minus two points. The weeks of similar pessimism over the past eight years can be counted on one hand.
Investors’ willingness to invest also remains low with a value of 0.0 points. It indicates that positions should be sold rather than newly entered.
The Euwax sentiment of the Stuttgart Stock Exchange, where private investors trade, has fallen to minus ten. The more negative this value, the higher the proportion of leveraged put products in investors’ portfolios. Hedging against price losses are once again booming.
Institutional investors, on the other hand, see the situation somewhat more constructively, the put-call ratio of the Frankfurt derivatives exchange Eurex is listed at a neutral value of 1.4 percent. The put-call ratio of the Chicago derivatives exchange CBOE is similarly neutral.
Fund investors in the US are unsettled
US fund managers have reduced their investment ratio back to 51 percent. This is also reflected in the behavior of US fund investors, because the investment ratio has been fluctuating violently for eight weeks without showing any direction.
The bull-bear differential stands at minus 14 and continues to show a strong bias of pessimists (39 percent) over optimists (24 percent). A “wall of worries” can also be seen among US private investors, with the US indices constantly climbing north. The “fear and greed indicator” of the US markets, calculated using technical market data, indicates slight greed with a value of 59 percent.
There are two assumptions behind surveys such as the Dax sentiment with more than 8,000 participants: if many investors are optimistic, they have already invested. Then only a few are left who can 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 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