It is a market phase characterized by great uncertainty.
(Photo: dpa)
Dusseldorf An important support mark has fallen on the German stock market. The leading index, the Dax, slipped below the 12,400 point mark last week and only stabilized at 12,200 points. Now it has to be seen whether this level represents a sustainable course floor or is just an intermediate stop on the way down.
The Handelsblatt survey of more than 7,000 private investors sends the first positive signals in this regard, explains sentiment expert Stephan Heibel: “Our sentiment index has slipped to minus 7.5 percent. This allows us to identify fear and panic, which is one of the prerequisites for a bottom.” The mood was just as bad as it is now in June.
Sentiment theory determines the mood among investors and interprets this as a counter-indicator. So when the mood is particularly bad, most have already sold. Only a few potential sellers are then left who can push the price further down. Therefore, according to Heibel, this is a good indication of a bottom.
In this respect, the significant losses from the past week are a positive sign that the Dax is bottoming out. The leading index lost almost two percent on Friday alone and fell to a new low for the year at 12,181 points, all with the second-highest trading volume in the past two months. The trading day thus bore the traits of a sell-off – often a sign that the end of falling prices is approaching.
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If, at the same time, there is still too much optimism about the future on the market, this suggests that a number of investors are still speculating on a short-term countermovement, explains Heibel. This then usually chokes off a short-term countermovement because they liquidate their positions in the rising market.
Uncertainty is great – but not yet great enough
This has already been observed several times this year at the Dax. The countermovement ended in mid-August in the area of 13,800 points and in mid-September at 13,500 points. It is currently not possible to determine whether this situation will repeat itself.
The bad mood is therefore not the only indicator of an end to the falling prices, says Heibel: “A sustainable basis is formed when there is no longer any hope.” In this phase there are hardly anyone who buy shares would like. However, at the same time the panic is so great that all potential buyers have sold and now no one can be mobilized for further sales.
The uncertainty is currently high at minus 6.8 percent, but is only just below the value of the previous week (minus 5.7 percent). When the Dax reached an interim bottom in early March and early July of this year, the uncertainty was even greater. At that time, the value was around ten percent.
On the other hand, pessimism has already reached the level of the end of June at minus 1.6 percent. Over half of respondents believe that three months from now, markets will either still be in a down move or will bottom out. From a historical perspective, however, this is still a moderate value, during the corona crisis values of more than minus three percent were reached.
However, Heibel still misses the willingness to buy among private investors: “It is currently at plus 1.2 percent, in June it had jumped to plus 2.9 percent. Although many investors seem convinced that a bottom is imminent, hardly anyone wants to buy just yet.”
In summary, Heibel only sees sufficient evidence for a temporary soil: “In the coming weeks we will have to examine again whether this is a ‘temporary’ or ‘sustainable’ soil.”
The managing director of the analysis company AnimusX notes positively that a lot of bad news has already been priced in on the market: for example the partial Russian mobilization in the Ukraine war, that the US central bank will raise interest rates without taking the economy or the labor market into account, or that Italy has shifted to the right as a result of the recent elections.
Nevertheless, Heibel remains cautious. “I find it difficult to make purchase recommendations now. According to sentiment theory, we have to buy when sentiment is so extremely negative. But we must not reflexively reach for the old shares that we have traded successfully in recent years.”
“We must not reflexively reach for the old stocks that we have traded successfully in recent years.” Sentiment expert Stephan Heibel
Because the environment of rising interest rates is bringing out new stock stars. “The geopolitical tensions and the ongoing supply chain problems are causing problems for many companies, and looking at the details when selecting stocks is extremely important,” says Heibel.
Low investment rate among US fund managers
Other stock market professionals are currently taking this cautious stance. On the European derivatives exchange, Eurex, the ratio between put options, which investors can use to hedge against falling prices, and call options, which they can use to bet on rising prices, is 1.3 percent. The institutional investors are currently neutral and wait and see.
The situation is similar in the US, where the put-call ratio on the Chicago futures exchange CBOE also indicates a neutral positioning – although the market-wide S&P 500 index has lost almost five percent in the past week. “One gets the impression that many investors expected this sell-off,” says Heibel, commenting on the development.
At the same time, US fund managers have reduced their investment ratio to 30 percent. The quota has thus returned to an extremely low level. In addition, the proportion of pessimistic investors, the so-called bears, is increasing compared to the optimistic bulls. Meanwhile, the proportion of bears is 43 percentage points larger – that is the highest value in a year.
Do you want to take part in the survey? Then let yourself be automatically informed 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.
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