Investors switch to crisis mode – what that means for the Dax

bull and bear

Investor sentiment has deteriorated for the fourth consecutive week.

(Photo: dpa)

Dusseldorf The price setback in the past week has significantly worsened the mood on the German stock market: Investors have switched to crisis mode. This is shown by the Handelsblatt survey Dax-Sentiment among more than 8000 private investors.

As a result, investor sentiment (sentiment) changed completely within a week: While it was almost euphoric after the Dax record with a value of plus 3.9 points in the previous week, it has now slipped significantly into the red with minus 1.2 points.

The mood last cooled down more sharply in June 2022. This was before the start of another corrective phase during the first phase of the Ukraine war.

Sentiment expert Stephan Heibel, who evaluates the weekly survey for the Handelsblatt and adds other indicators, sees a smorgasbord of reasons for the change in mood: including the US debt dispute, in which a compromise was only found after the end of the survey, the economic Weakness in Germany and continued high inflation.

At the same time, Heibel also states: “Actually, investors shouldn’t be surprised about a setback after the brilliant rally of the past few months.” After all, the Dax has risen by almost 15 percent since the beginning of the year, and since the beginning of October 2022 it has even been more than 30 percent.

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Against this background, the weekly minus of 1.8 percent is moderate. “Nevertheless, uncertainty sets in immediately,” observes Heibel. Investor complacency fell from plus 1.7 points (moderate satisfaction) in the previous week to minus 1.3 points (moderate uncertainty).

According to sentiment theory, both points speak against sharply falling prices. Because if investors are pessimistic, they have already positioned themselves accordingly and sold positions or hedged against price losses. As a result, there are fewer sellers left to push prices down.

Professional investors protect themselves massively

This tendency is reinforced by the behavior of professional investors. Because on the European derivatives exchange Eurex, where institutional investors trade, the put-call ratio has shot up to 8.0 percent. “In the previous week, this value was 2.7 percent, the long-term average is 1.5 percent,” notes Heibel.

The put-call ratio is the ratio of traded put options, which increase in value when prices fall, to call options, which investors can use to benefit from rising prices. The larger the value, the more the professionals prepare for falling prices.

Sentiment does not yet indicate a bottoming out

“The strong increase in the hedging tendency of institutional investors in Germany is drawing a floor under the Dax,” explains Heibel. In principle, put options work like bets on falling prices: Put simply, the bank has to sell the Dax in the background when an investor buys a put product on the index. When the derivative is sold, the bank has to buy back the Dax. So when prices fall and lots of hedges are redeemed, it stabilizes prices.

However, Heibel also states that the mood is not yet bad enough to be sure of bottoming out. That would only be the case in a real panic when almost all potential buyers have sold. Instead, future expectations have improved. The associated value increased from minus 2.9 points to minus 0.5.

The willingness to invest has also returned – albeit at a low level. After being in negative territory for the previous two weeks, it has now risen to plus 0.6 points. This makes it difficult to forecast further price developments, explains Heibel.

However, the managing director of the analysis company AnimusX points out another special feature: The mood on the US stock exchanges is significantly better, and the price development is correspondingly different: while the Dax lost 1.8 percent in Germany, the market-wide US index S&P 500 laid slightly, the tech index Nasdaq 100 even more than three percent.

“In this country, the people are prepared to save, the energy transition cannot be achieved with sun and wind, so we have to save,” explains Heibel. “Inflation cannot be defeated by efficiency gains, only by higher interest rates, which will result in – or worsen – a recession.”

AI causes a flood of investments in the USA

The situation in the USA is completely different. “There, the successes of ChatGPT have triggered a flood of investments. The lack of personnel is being answered with artificial intelligence, the chip industry is happy about full order books,” says Heibel. “Increases in efficiency lead to increased productivity and can curb inflation without risking a recession with interest rates that are too high.”

But the difference in mood also has an advantage, explains the sentiment expert: “In the USA, confidence obviously dominates despite the many trouble spots. I would deduce from this that weak prices in the USA would only have a below-average impact on the Dax in the coming week.”

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.

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