Dusseldorf Investor pessimism about the future has reached its highest level in more than three years. Most now expect falling prices for the leading German index Dax in the next three months.
This is shown by the current evaluation of the Handelsblatt survey Dax sentiment. According to sentiment studies, such behavior is considered a warning signal, because pessimistic expectations for the future are usually accompanied by falling prices. Experts then speak of positive correlation. True to the motto: If investors expect prices to fall in three months, why should they buy?
But for the sentiment expert Stephan Heibel, who evaluates the weekly Handelsblatt survey, this connection does not always exist. “My data, which goes back to 2006, shows that the correlation sometimes changes over time,” explains the owner of analysis house AnimusX.
He has several examples of this. The correlation between the Dax prices and investor expectations was mostly positive from mid-2017 to mid-2019. It was a market phase in which the German stock market barometer was consolidating, and most investors did not believe that prices would rise in the future.
Only after a new uptrend was established did the correlation turn negative again. During this phase, investors doubted the sustainability of the upswing, which lasted until early 2020. “A negative expectation in a bull market can be taken as confirmation,” he explains. A market phase in which the index has risen by at least 20 percent is considered a bull market.
Another example: The correlation has been negative since 2020, after the corona crash in February/March 2020 there was a bull market until the beginning of 2022. At that time, too, investors had long had doubts about a sustained upswing.
However, in 2022, when the Dax corrected, the negative correlation disappeared. “This phenomenon of a negative correlation between rising prices and pessimistic expectations for the future can always be observed when a bull market has been running for some time,” explains the sentiment expert, adding: “like the current bull market, which started at the end of September”.
His conclusion from the currently negative expectations for the future: “This behavior of investors signals an imminent consolidation, supported by other technical indicators.” However, he does not expect a longer and significant price slide and accordingly no end of the current bull market. Because the clear hedging behavior of institutional investors is more likely to prevent a correction, a decline of at least ten percent.
These put options, used for hedging, work in much the same way as short selling. Put simply, this means that if an investor buys a put product on the Dax, the leading index is sold first. If the derivative is sold, the Dax must be bought back, which causes the price to rise.
The Dax ended the week before Easter almost unchanged. A new high for the year was reached in the middle of the week, followed by a short breather. “Against the background of the black painting in many financial media, it is astonishing that the Dax was able to stay close to the record level of 16,290 points,” explains Heibel.
The reporting season begins after Easter, with US banks traditionally reporting first. After the banking crisis, many investors fear that more bad news is slumbering here.
Current survey data
Investor sentiment fell as a result of plus 3.8 points in the previous week to plus 2.7. Just a week ago, investors were almost in a party mood, starting at a value of plus four. But the Dax breather in the past week has obviously led to moderate disillusionment.
However, this did not detract from investors’ self-confidence, which remained at 1.4 points.
What is surprising is the significantly lower and now extremely negative future expectations with a value of minus 2.2 points after minus 1.4 in the previous week. In the summer of 2019, almost four years ago, pessimism about the future was so pronounced.
So it is not surprising that the willingness to invest of minus 0.1 does not indicate a buying mood. The last time there was a negative willingness to invest was a little over a year ago in the run-up to Russia’s invasion of Ukraine.
The Euwax Sentiment of the Stuttgart Stock Exchange, where private investors trade, remains in neutral territory with a value of two. The number of call leverage products and put derivatives in private custody accounts is roughly the same.
Investors have sold the many put protections against falling prices that were bought from mid-January to mid-February.
The put/call ratio on the Frankfurt futures exchange, Eurex, is quite different, from which one can read institutional investors’ appetite for risk. The value of plus 9.1 shows extremely strong protection against falling prices.
The put/call ratio on the Chicago futures exchange CBOE, on the other hand, is in the neutral range. Apparently, US investors do not share the pessimism of Germany’s institutional investors, but behave more like local private investors. US fund managers have raised their investment ratio to 73 percent. In the previous week, this value was still 65 percent.
Among US private investors, the bear camp has emptied by ten percentage points, and now only 35 percent are pessimistic. The former pessimists immediately switched to the bulls’ camp, and one in three is now optimistic. The bull/bear spread has jumped from minus 23 in the previous week to just minus 1.7.
The “fear and greed indicator” of the US markets, calculated using technical market data, shows only moderate greed with a value of 60 percent. Other technical indicators such as the Short Range Oscillator, on the other hand, are listed in the overbought area with a value of plus six percent and signal a need for correction, at least in the short term.
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.
Party mood on the gold market
The mood on the gold market shows signs of a party mood. The price of gold has jumped over $2,000 an ounce (31.1 grams) and gold investors are celebrating accordingly. In the next one to two months, a breather, perhaps a small consolidation, can also be expected in the gold market. On a six-month horizon, on the other hand, the good mood speaks for a further increase in prices with a probability of 73 percent.
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