A market phase characterized by great uncertainty.
(Photo: dpa)
Dusseldorf Despite the recent recovery on the stock market, sentiment among private investors has deteriorated. This is shown by the Handelsblatt survey Dax-Sentiment among more than 6000 participants. However, this does not have to mean anything bad for future price development, says sentiment expert Stephan Heibel, who evaluates the weekly survey. “This is exactly the mood in which stock markets can rise continuously.”
The leading German index Dax reached 14,925 points last Tuesday, the highest level since the Russian invasion of Ukraine. On a weekly basis, the Frankfurt stock exchange barometer was at times more than four percent up. At the close of trading on Friday, however, only a plus of one percent remained.
The interim high was also due to a technical effect: professional investors had massively hedged themselves against falling prices with put options, but around the previously critical mark of 14,500 points the hedges went into the red. These positions were liquidated and adjusted in the first half of the week.
As a result, prices initially continued to rise. 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. “Then this technical demand broke away, prices fell back a little, and the Dax has now moved sideways at the current level,” explains Heibel.
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The mood to buy that had arisen in the meantime has ebbed away as a result. The Dax sentiment remains in negative territory and continues to indicate a depressed mood at minus 1.5.
Investors’ doubts have also increased, in the Dax sentiment they are presented as uncertainty: last week the value rose to neutral for the first time since the beginning of the year, but has now turned negative again. “Any positive developments are immediately dismissed as utopian,” explains Heibel.
The Dax rose on a weekly basis despite the recent profit-taking, more than 60 percent of the survey participants had even expected this development and are likely to have made profits. “I’ve observed something like this quite often,” says Heibel: “Many investors are satisfied with a small counter-movement far too early. Much too soon, the next doubts arise again, nourished by the recent experience that all warning signals were ignored before the original crash. That shouldn’t happen anymore, so the mood barometer swings again early on.”
Expectations for the future have also fallen in the survey. The camp of pessimists, optimists and neutral investors is still about the same size, but the proportions have shifted somewhat in favor of the pessimists. As a result, expectations are negative for the first time since mid-November. After the crash as a result of the Russian invasion, this value was still plus 3.7. At the time, many investors obviously saw great opportunities for a rapid recovery.
This optimism has turned into pessimism as a result of the rapid price recovery. However, this negative mood can be helpful for future price developments, says Heibel. Due to the predominantly pessimistic attitude of investors, there are always enough buyers who switch to the optimist camp and thus further drive prices, explains the managing director of the analysis company AnimusX.
Because there are two assumptions behind surveys such as the Dax sentiment: 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.
In theory, there are good entry opportunities for investors in these times, explains Heibel. In practice, however, it is more complicated: “In this market and mood phase, it takes a lot of effort to still be on the buyer’s side. There are few arguments to buy, other than past experience that by the time we know the arguments, it’s often too late to buy.”
Against this background, the willingness to invest is interesting, which remains moderately positive with a value of 1.5, even if the number of prospective buyers has fallen.
“The willingness to invest doesn’t quite fit the picture if we translate ‘invest’ with ‘buy’,” says Heibel. But many market participants worked with short sales – short bets or hedges. That too is an investment. “Against the background of German investors’ great propensity to hedge, I would therefore interpret the willingness to invest this week to mean that they would like to continue to protect themselves against falling prices with put protection,” says Heibel.
Because the Euwax sentiment of the Stuttgart Stock Exchange, where private investors trade, shows a high level of hedging activity and has fallen to minus 7.5. So many private investors have bought put options that increase in value when prices fall. When prices are falling, the puts are usually sold and thus prevent a strong sell-off.
The hedging of professionals has also increased, as shown by the put/call ratio on the European derivatives exchange, Eurex. At 2.2, it indicates a significantly higher propensity to hedge than in normal stock market phases.
On the one hand, these safeguards act as a safety net against sharply falling prices. At the same time, they can also amplify the trend when markets are rising – as last week has shown – if these hedges are unwound in the meantime. “This strong hedging tendency in Germany makes it more likely that the rally will continue in the near future than a dive to new lows,” says Heibel.
At the same time, the sentiment expert warns: “We cannot forecast external events such as the further course of the war. A negative development can nullify any interpretation.” The only interpretation that remains is that the market would react less negatively to a negative development than it would react positively to a positive development.
situation in the United States
The Ukraine war is not as big an issue on the US stock exchanges as it is in Europe. On the one hand, this is due to the fact that the USA is less affected by this due to its theoretical self-sufficiency. At the same time, however, Heibel sees the “sad realization that Americans are used to investing in times of war. Shortly after the outbreak of war, the cards are on the table. A trial of strength ensues for a while before compromises are sought.” None of the warring parties can really come as a surprise now, because even the worst fears have already been discussed.
In the USA, therefore, the put hedges are already being dissolved again. The put/call ratio of the Chicago derivatives exchange CBOE falls back to an average level. At the same time, US fund investors have increased their investment ratio to 80 percent. Shortly after Russia invaded Ukraine, this figure was still 30 percent.
Among US private investors, the camp of neutral investors is by far the largest. The bull/bear ratio, i.e. the ratio of optimistic investors (bulls) to pessimists (bears), is four percent. The camp of the optimists is therefore four percentage points larger than that of the pessimists. The technical “fear and greed indicator” of the market-wide index S&P 500 shows a neutral market condition with a value of 51 percent.
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