DAX-Sentiment: Pessimism Pays Off

11 April 2012. FRANKFURT (Börse Frankfurt). It didn’t seem to matter whether it was caused by the global economy taking another downturn, or by the monetary policymakers withdrawing crisis measures prematurely, investors in this survey were convinced last week that stock prices were going lower. In the end, it was a surprisingly weak US non-farm payroll number and a re-inflammation of the eurozone debt crisis that did the trick. Since the last poll the DAX index has shed some 3.5 percent amid widespread fears that the best of US employment growth may be behind us and that the period of relative calm in the eurozone periphery may be over. Arguably, this is precisely the move domestic investors in Boerse Frankfurt’s weekly survey had been looking for. At least, they wasted no time returning to the market and buying back the stocks they had consistently sold over the previous three weeks.

For some observers, the idea of adopting a more benign stance on equities right now seems a little odd. The spread in Spanish and Italian bond yields over the German Bund is on the rise once again. Banks in the eurozone periphery are no longer buying enough of their respective sovereign’s paper, possibly because the LTRO money is now only sufficient to replace deposits lost to banks in the core. Another LTRO doesn’t seem to be a solution either, not least because the pool of eligible collateral dwindles with every operation, but also because haircuts rise as the collateral becomes more unconventional. In the last ECB press conference President Draghi revealed that haircuts on some securities had already reached as high as 75 percent. So, without any immediate solution to the re-emergent debt crisis in sight, what lies behind the largest optimistic shift in the Bull/Bear-Index so far this year? Some 13 percent of those polled quit the bearish camp, mostly in favour of the bulls. One can assume, therefore, that stocks were generously bought. In the previous three consecutive weeks, though, these investors had sold consistently, mostly at index levels north of 7,000 points. In the three trading days when the market was open during the last survey period, they were able to rebuy some 300-400 points lower. The DAX has obviously reached a level where the relative gains from the pessimistic stance offsets the underperformance recorded during the first quarter, when investors remained stubbornly bearish in the face of a relentless DAX rally. The question is: now they have put a disappointing first quarter behind them, will investors change their strategy?

On balance, this institutional buying did not help stock prices too much – it seems merely to have prevented what might have been a steeper decline. Given the corresponding decline in the single-currency, it is likely that foreigners have been among the sellers. So, if the DAX were to rally again, would domestic investors sell around the levels they successfully sold the last time, or would they keep out of the way? We tend to believe the former: the sceptical view has been remarkably tenacious this year. If investors cannot be convinced to hold stocks during the eurozone lull, they might also be reluctant during a fresh storm.

© 11 April 2012/ Gianni Hirschmüller, cognitrend