DAX-Sentiment: DAX still scales the wall of worry

18 July 2012. FRANKFURT (Börse Frankfurt). Since last week’s survey, the DAX has practically gone only one way: higher. There was no real positive news for the market, or for the German economy. On the contrary, market commentators have succeeded in constructing a ‘wall of worry’ using bricks variously labelled: ‘downward revision to global growth forecasts at the IMF’; ‘Italian sovereign debt downgrade by Moody’s’; ‘German Constitutional Court decision pending’; and ‘write-downs in prospect for Spanish banks’ junior bondholders.’ One could also add: ‘Bernanke dashes hopes for Fed QE3.’ Despite this, equities have continued to grind higher; the DAX has not been this high at survey time since early-May.

At another time, this development might have caused investors to puzzle over the relative robustness of the market and, perhaps, to draw some reassurance from it. Instead, the domestic institutional investors in the Boerse Frankfurt’s weekly survey panel have slipped effortlessly into a familiar behavioural pattern: selling into strength. Admittedly, the shifts in sentiment, as measured by the Cognitrend Bull/Bear-Index, are very modest this week: just 4 percent of the panel moved into the pessimists’ group, mostly at the expense of the bulls. Still, it is noteworthy that this was the direction at all, because a very similar situation to this unfolded just two weeks ago.

Then, in the wake of yet another all-night EU crisis resolution meeting in Brussels, DAX investors took advantage of the market’s proximity to a one-month high to express their disenchantment. What followed was the third most bearish sentiment reading of the year. Thereafter, however, the market continued to march higher. The stubborn rally must have taken the sceptics by surprise because, in the subsequent week, they scrambled to buy all of the underweight positions back. Today, the DAX is again flirting with a recent peak – this time, the highest level in two-and-a-half months. This peak is more than three percent above the last one, but the investor reaction is the same.

The outcome from the current sentiment configuration might not be exactly the same as the last time, not least because the bearish shift is less far widespread and, thanks to the holiday-thinned market, the size of the underweight engagements is likely to be smaller. Still, we expect the DAX to deliver a new peak within the current recovery. We doubt this will dispel what appears to be the deep-seated scepticism inherent in today’s results. German institutional investors are simply not convinced that stocks will embark on a lasting rally. We suspect, for a large proportion of them, a DAX level of 6,000 is far easier to imagine than one of 7,000, even though the latter is closer. Selling into strength is almost a knee-jerk reaction. While this is the case, the DAX recovery might still have legs.

© 18 July 2012/Gianni Hirschmüller, cognitrend