Only a panic-like sell-off should end the weak phase

Dusseldorf After the bumpy start to the year on the German stock market, there is still no end in sight to further price losses. This can be derived from the data of the current Handelsblatt survey Dax-Sentiment.

There is already a great deal of pessimism both in Germany and in the USA, both among private investors and among professionals. According to the sentiment analysis, this is a counter-indicator and tends to signal rising prices again. However, according to sentiment expert Stephan Heibel, “there is a lack of confidence to turn this pessimism into stock purchases, which would end this generally weak stock market phase early on”.

A week ago, the experts were concerned about the declining expectations of investors. Nothing changed about that. The significant price losses in the past week in the technology and healthcare sectors were more of an additional burden.

According to sentiment analysis, there are two ways in which a weak stock market phase can end. The first variant: A fundamental development increases optimism among investors and thus their willingness to buy. Strong economic data would be one such factor, for example. Coupled with a corresponding optimism about the future, such price declines end quickly. Investors are willing to buy again if they believe prices will rise.

The other variant is a panic sell-off, in which everything is thrown on the floor at the end. In this case, any speculation will be dissolved, as well as positions that the shareholder is not fully convinced of in the long term. “That would then be a final sell-off that ends when there is nothing left for sale,” explains Heibel.

Since the Corona crash at the beginning of 2020, almost every sell-off has finally ended due to renewed interest in buying – i.e. the first scenario described. After a minus of five to seven percent, there were always bargain hunters who provided a new “bottom” for the charts with their purchases. Investors who bought into such a setback could look forward to price gains just a few days later.

Most recently, at the end of October 2020, there was a setback with a minus of more than ten percent. Then brokers speak of a correction. Shortly before the US presidential election and the first corona vaccine, the Dax slipped by around 15 percent. But even then, the losses were recouped within a few trading days.

But now there is an additional factor that could speak for a panic sell-off. Since the Corona crash, many new, inexperienced shareholders have gone public in Germany via Trade Republic and in the USA via Robinhood. Many of them have not yet experienced a correction, which is more typical for a stock market year.

Since the turn of the millennium there have only been two years without a correction: 2003 after the bursting of the technology bubble and 2021. “The question is therefore not if, but when we will experience a sell-off again, which will lead to panic,” says Heibel.

Oil market rally likely to end

The opposite development can be observed on the oil market compared to the stock market. The price of oil has risen above 80 dollars per barrel (159 liters), the mood is in the euphoric range. Investors are happy about the high level.

But expectations for the future have fallen, and the value is close to the zero line. Further price gains for oil are therefore not expected. It is now to be feared that the oil rally will not receive any further support in the short term and will peter out.

Positive environment for Bitcoin

For Bitcoin, on the other hand, expectations for the future are rising sharply, and the mood has been very weak for many weeks in a row. Heibel sees this as a sign that the current Bitcoin price of just over $42,000 already seems cheap enough for many investors to buy.

Current survey data

From the current data from the Handelsblatt survey, it can be deduced that there are many stocks in the portfolios of the survey participants that have been sold out in the past few days, and that there are hardly any papers that are currently in demand. Because although the Dax only fell 0.4 percent last week, investor sentiment continued to fall in the second week of the young year. With a value of minus 1.7, the mood is now as bad as it was in early December, when the new Omikron variant caused a sell-out.

Uncertainty continues to grow in the second week of the tech sell-off to minus 2.5, even though that reading was below minus 5 in early December. This indicates that many investors have been caught off guard by recent developments.

As a result, investors doubt that the Dax will rise in the next three months. The formerly high level of optimism about the future has now completely disappeared, the value is zero. That wasn’t even the case in early December. From October onwards, very few people had any doubts about the economic upswing that would continue to pull the stock markets up. But that has now changed.

The willingness to invest has dropped to a value of minus 0.4. This is the lowest willingness to invest since May 2021, when the vaccine rally had many investors afraid of heights.

The Euwax sentiment of the Stuttgart stock exchange, where private investors trade, is listed with a value of minus four in the slightly negative area. When it comes to financial products, hedging products easily dominate. The same picture can also be seen on the Frankfurt derivatives exchange Eurex, where professionals hedge: The put/call ratio of 2.0 shows that institutional investors have a slight tendency to hedge.

The situation in the USA is similar, although not as extreme. The put/call ratio there has returned from the extremely bullish bias to neutral territory since mid-December. US fund managers have reduced their investment ratio to 75 percent. The investment rate was temporarily lowered to 52 percent at the beginning of December, but rose again to over 80 percent at the turn of the year. But now the pros are going into reverse again.

The bull/bear ratio of US private investors shows an overhang of the bears with a value of minus 13. Pessimists also dominate the trading floor in the USA. The US markets “fear and greed indicator” calculated using technical market data shows a neutral condition with a value of 52. The same is true for the short-term technical indicator, the Short Range Oscillator. At the turn of the year, this indicated that the market was heavily overbought, so that the following correction could be read off this indicator.

There are two assumptions behind surveys such as the Dax sentiment with around 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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