DAX-Sentiment: DAX rises against the odds

4 July 2012. FRANKFURT (Börse Frankfurt). Investors selling equities after a summit of EU heads of state or a finance ministers’ meeting has become such familiar pattern that the rule could be carved in stone. Regardless of how ‘fruitful’ it is claimed to have been, irrespective of how much ‘progress’ was said to have been made, and independent of how ‘important’ the agreed measures were supposed to have been, stock market operators have learned that disappointment invariably follows. The recent EU summit was different only in that investors were so disenchanted that many of them sold even before the EU leaders arrived in Brussels.

The meeting was described as a ‘breakthrough’, but this seems to have only been because journalists perceived German Chancellor Merkel to have somehow ‘lost’ the negotiations. Some of the key concessions were suspected in advance, for instance the removal of an insistence on the seniority of funding by the European bailout institutions. Other measures, such as the supervision of banks within a banking union, the ability of the rescue bodies to buy sovereign debt in the secondary market, and the striking of conditionality for countries seeking additional rescue funds, all seem to have been misunderstood in various quarters of the EU. As a result, investors could not be sure whether anything had really been agreed at all.

This almost immediate disillusionment may have been what provoked domestic investors into wanting not only to hedge against disappointment, but to try to actively profit from it. Since last week there has been a huge bearish shift in the views of the panel surveyed weekly by Boerse Frankfurt. Over the last five trading days the sentiment of these domestic institutional investors, according to the Cognitrend Bull/Bear-Index, has plunged from a level that one could consider neutral, to the third-lowest of the year. It is almost impossible to identify when during that time they sold equity positions. What we can say is that it made very little difference: the DAX index has climbed some 6.5 percent since the last survey and, in the last three sessions, has pushed higher practically without correction. Our suspicion, based on past reactions to previous summits, is that they acted very quickly after the breakthrough was made public, namely, on Friday or on Monday at the latest. As the DAX was also trading at six-week highs at the time, the mid-6400, one could also imagine that these were index levels observers would perceive as relatively high.

We recognised last week that the situation domestic investors would consider the most problematic is one where the DAX suddenly ran sharply higher. It was clear that rebuilding longs would be psychologically difficult under such conditions, but we are nonetheless taken aback by the aggressiveness of the new bearishness. The proportion of bulls, for instance, has been lower only once so far this year. This means that we are not expecting many more would-be profit-takers from this group. As for the current bears, a sizeable proportion is already likely to be losing money on their latest stance (on earlier stances too, if established in the previous six weeks). The obvious danger here is that the familiar relationship between stocks and summits is broken. From now on, ‘good’ EU news will be taken at face-value, whether investors believe it or not.

© 4 July 2012/Christin Stock, cognitrend