The potential for surprise is on the upside

Bull and Bear in front of the Frankfurt Stock Exchange

Many investors have prepared for falling prices.

(Photo: dpa)

Dusseldorf The upward trend in the leading German index Dax has weakened after the best start to the year in its history. “Now it is being discussed whether an imminent recession could throw the stock markets back into their bear market or whether we only see a short breather,” says Stephan Heibel, Managing Director of the analysis company AnimusX.

A longer phase of falling prices is viewed as a bear market – and in fact a pullback after the strong rally seems overdue. This year, the Dax has risen by around eight percent or more than 1000 points. Since the end of September it has been more than 25 percent.

But the Handelsblatt survey Dax-Sentiment among more than 7000 private investors came to a different conclusion. “The potential for surprises is clearly on the upside,” says Heibel, who evaluates the weekly survey and adds other indicators. The chance of further rising prices is therefore greater than the risk of falling prices.

What speaks against a major pullback, or even a correction of 10% or more, are the strong hedges that investors have built up over the past week. This can be seen in the Euwax sentiment of the Stuttgart Stock Exchange, where private investors trade.

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A negative value means that they assume falling prices – and last week sentiment collapsed to minus 15 percent. “Private investors are therefore expecting a stronger setback in the coming weeks and are protecting themselves accordingly,” says Heibel.

This growing skepticism is also reflected in the sentiment survey. Investor sentiment has slipped to 1.1 from 4.5 the previous week. “The euphoria of the previous week has already evaporated, the mood of investors is neutral,” observed sentiment expert Heibel.


The need for hedging is obviously similar for institutional investors. The put/call ratio on the European futures exchange Eurex has jumped to 3.6 percent. Professionals are therefore increasingly putting put options in their portfolios, which increase in value when prices fall.

Since many market participants expect prices to fall, this scenario has the least potential for surprises. “The strong hedging purchases on Eurex and Euwax should ensure that we will not see a resumption of the bear market for the time being – with a view to the next few weeks,” explains Heibel.

Hedges stretch a safety net for the Dax

Because put options work practically like short sales. Put simply, this means that if an investor buys a put product on the Dax, the bank has to sell the Dax in the background. And when the derivative is sold, the Dax must be bought back again. So strong hedges create a kind of safety net that cushions a price drop to a certain extent.

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This effect could already be observed to some extent in the past week. The setback did not even allow the Dax to fall below the 15,000 point mark in the long term. “Hardly anyone was really surprised by the setback,” says Heibel. Therefore, complacency remains with a value of 0.8. “The uncertainty that weighed on investors for the whole of last year is far from returning after a few days of breather. Small setbacks are easily tolerated.”

The breather is even considered healthy. The future expectation has risen from minus 1.1 to plus 1.5. So investors are getting a little more optimistic.

Willingness to invest is almost constant, falling from 0.9 to 0.8. “Many investors have obviously positioned themselves long in the meantime, but do not want to follow up on the current price level,” says Heibel.

As a result, the potential for surprises is on the upside, as Heibel explains: “If, contrary to the expectations of domestic investors, the consolidation of the Dax does not lead the Dax significantly lower again in the coming days, where they would then cover their hedging positions, then domestic investors could come under pressure, having to liquidate their hedging positions as prices rise.”

The rule is that the longer there is no significant price decline, the greater the pressure on hedging positions. If they are then unwound, the rally will be fueled further – not only via the short-buying, but also as the previously underinvested investors chase the rising prices.

Incidentally, the decisive initial impetus for rising prices could come from international investors: In the USA, the put/call ratio on the futures exchange in Chicago has fallen significantly to 1.0. The need for hedging is therefore decreasing. Appropriately, US fund investors are becoming bolder, the investment ratio of US fund investors has risen by 20 percentage points to 65 percent. So there is a “mood discrepancy between investors in Germany and in the US,” notes Heibel.

“We can see from the international cash flows and the sharp rise in the euro exchange rate against the US dollar that a good part of the stock market rally in Germany can be attributed to international investors,” Heibel continues. “Obviously, international investors see the situation in Germany more positively than we would like to admit.”

There are two assumptions behind surveys such as the Dax sentiment with more than 7800 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 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: Twelve tips from stock market psychologists for smart stock market decisions.

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