DAX-Sentiment: DAX investors stifle Spanish ‘bailout’ rally

13 June 2012. FRANKFURT (Börse Frankfurt). The most dramatic price action in the DAX over the latest survey period came after the announcement of a €100bn EU bailout for Spanish banks. At least, in the pre-open futures market on Monday, the news was responsible for a sizeable leap in stock prices that lifted the benchmark DAX briefly above the 6,300 mark. One had to be quick to trade at such prices though. By the open, prices had already started slipping; by the close, the index had given back all of the gains. Investors’ discussions seemed to quickly turn to the increasingly shorter half-life of ‘good’ news concerning the eurozone crisis. This bailout amount easily surpassed market estimates of what was needed (‘ahead of the curve’) and was apparently reached without lengthy, heated discussions among policymakers (high consensus). Yet it was unable to reassure the market for more than a few hours. The short-lived euphoria was held up as proof of European political leaders’ threadbare credibility. However, many of those who bemoaned the brevity of the bounce were themselves among the early sellers. What’s more, their selling may not have had anything to do with their opinion about the usefulness of the plan to save the Spanish banking system.

Boerse Frankfurt’s previous survey of institutional domestic investors recorded a large increase in bulls, during a week where the market fell more than four percent to the year’s low. Although, it would have been flattering for the panel to assume that many had bought at the best prices within this range, our conclusion was that they were more likely to have bought at the worst. In concrete terms, we mooted that many of these new bulls actually entered at DAX levels around 6,300, i.e., before the month-end. We also classified the tenacious bullishness, in spite of the steep price fall, as an emergent bias. This meant that, irrespective of the EU finance ministers’ decision on Spain, many of those stranded bulls would have sold out some of their portfolios if a loss-free opportunity were to present itself. The bailout sum could have been twice the size, and decided upon twice as quickly, many of those sell orders would have been placed anyway.

Today’s survey reveals that more than half of those that identified themselves as optimists last week have since fled back to the ‘neutral’ camp. This has had the effect of dragging down the Bull/Bear-Index, our single measure of overall optimism. That this sentiment measure has not fallen further is due to the simultaneous retreat of some three percent of the panel from the bearish camp. Pessimists have been steadily cashing in profits since mid-May and currently count the fewest number of members since the start of the year. This suggests that there might not be too much demand in the future from short-covering alone. However, more than half of the most urgent sellers are also out. So, although the picture still reflects a bullish bias, the size of this bias has been meaningfully reduced by the week’s oscillations.

© 13 June 2012/Joachim Goldberg, cognitrend