Little upside potential, big downside risk

Dusseldorf On the stock market, investors are speculating on a sideways movement: Many would sell their positions again at Dax prices well below 16,000 points. At prices of 15,000 points in the leading German index, many want to buy properly again. This can be derived from the data from the Handelsblatt survey Dax-Sentiment and the survey by the analysis company Animusx.

On the one hand, the survey participants do not expect an attack on the record high of 16,290 points any time soon. On the other hand, they do not anticipate any significant slide in prices.

For the sentiment expert Stephan Heibel, this results in “a dangerous state of the market”: hardly any upside potential, great downside risk. Investors would have to hope that prices will continue to move sideways for a while.

Because it is currently unlikely that a rally will allow the Dax to rise to new all-time highs. The investment rate is too high for that. So there is a lack of new buyers to drive prices further.

A recovery movement should therefore quickly be slowed down again by profit-taking. That was already the case last week, when it ended at 15,736 points. If the Dax falls below the 14,800 point mark despite the interest in buying, panic selling is likely to occur, which will cause the leading index to slide further.

The five-week average of sentiment, which reliably shows correction lows of longer price slides, is encouraging. The indicator is currently trading at the lowest level since August 2019. At that time, the geopolitical tensions between China and the USA were the reason. A stock market rally followed in 2019, with the Dax climbing by around 15 percent by the end of the year.

But a comparison is limping. This time, other sentiment indicators such as the high investment rate speak against a high rally. However, Heibel does not expect a pronounced correction either: “Based on this already very negative sentiment, a slip below 14,800 points without a correspondingly negative event is rather unlikely,” he says.

Current survey data

With a reading of minus 4.8, fear and panic reign supreme in near-term sentiment. That shouldn’t come as a surprise: Last Friday, the Dax slipped back towards 15,000 points. At the same time, the investment ratio of investors is extremely high.

With a value of minus 4.6 for the survey item “self-satisfaction”, there is great uncertainty among investors as to whether this high investment rate is correct.

Expectations for the future have also been scratched. After reading 1.9 two weeks ago and 1.7 a week ago, that number has since fallen to just 0.7.

Although optimism still predominates in the expectations, this optimism continues to decline. Therefore, hardly anyone wants to buy new shares, the willingness to invest has fallen to just 0.4. In the previous week, this value was still 1.4.

The Euwax Sentiment of the Stuttgart Stock Exchange, where mainly private investors trade, shows a very high willingness to take risks with a value of plus five. Positive values ​​indicate a surplus of call versus put products in private investors’ custody accounts. So many rely on rising prices, hedging with put products, which increase in value when prices fall, hardly takes place.

The professionals who hedge via the Frankfurt futures exchange Eurex have a put/call ratio of 1.3. This is mostly neutral with a slight overweight for call speculation on rising prices.

In the US, the put/call ratio paints a completely different picture: after a year and a half of excessive long speculation, the put/call ratio is now shooting up, showing a sharp rise in put hedging.

This is matched by the continued low investment ratio of US fund managers at 63 percent and the bear surplus among private investors with a bull/bear ratio of minus 17 percent. 44 percent of private investors are pessimistic, only 26 percent are optimistic. The “fear and greed indicator” of the US markets, calculated using technical market data, shows a slight fear with a value of 33 percent.

Sentiment data on other asset classes

• bond market: The historical turnaround in interest rates was confirmed by further increases in yields: the current yield on a ten-year federal bond has remained above zero for several days. The price of the Bund future, which refers to a fictitious ten-year federal bond, has fallen accordingly. Because the price of the Bund future and the yield on a ten-year Bund behave in opposite directions. A look at the current sentiment data on the bond market suggests that the rise in yields has come to an end for the time being. Because both the mood and the expectations for Bund futures are extremely negative and mean that prices for the futures contract can be expected to rise again – and in return falling yields.
• oil market: There is an interesting sentiment on the oil market. On Friday, the price of the US variety WTI for a barrel (159 liters) reached the 93 dollar mark, the highest price in eight years. The oil investors are correspondingly happy, they are celebrating their success. The party mood is at an extreme point, but at the same time optimism about the future has collapsed completely. That’s why Heibel says: “There is a risk of a serious correction in the oil market very soon.”

There are two assumptions behind surveys such as the Dax sentiment with more than 6500 participants: If many investors are optimistic, they have already invested. Then only a few are left who could 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 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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