DAX-Sentiment: DAX investors are fast learners

20 June 2012. FRANKFURT (Börse Frankfurt). Stock market investors have to be fast learners. However, learning requires accurate feedback about cause and effect. Financial markets, however, do not always provide the best feedback as the causes behind the observable effects are obscure, unstable, or simply non-existent. One lesson, that investors ‘learned’ over a week ago is that one should not trust any supposedly good news coming out of the eurozone. For example, after EU authorities agreed on a €100bn bailout for the Spanish banking system the subsequent stock market rally did not even last a day. Even though the weekend agreement had been swift and the amounts discussed sizeable, the DAX price jump at the Monday open fizzled out within hours. In the subsequent days the entire market discussion centred on the increasingly short half-life of finance ministers’ policy initiatives. Many commentators then went on to bemoan the grimness of the situation in Greece, Spain Italy, and to resign themselves to the fact that nothing would change any time soon. So when on the subsequent Monday morning, in the aftermath of the Greek election, the DAX opened at the highest level of the month, the lesson learned was immediately at hand.

For many of the domestic institutional investors on Boerse Frankfurt’s weekly sentiment panel, the opening leap on Monday was more than welcome. As we reported in recent sentiment summaries, many of those who had expressed bullish views in the last two weeks actually entered their engagements before the end of last month. This meant they suffered unexpectedly during the early-June decline and were anyway planning to lighten the load in the case of a breakeven opportunity. The strong open that followed both the Spanish bailout and the Greek election provided precisely these opportunities. By the time the second event came around, the sell-on-god-news schema was familiar not only to stranded longs, but to everybody else too. This might explain why the proportion of bulls on the panel shrank by 8 percentage points and that of the bears increased by 11 points. Many investors obviously wanted to profit from the disappointment and price decline the ‘good’ news promised to deliver.

Already yesterday, as DAX stocks raced to even higher highs, it became clear that the cause and effect investors thought they understood might not have been correct. Stocks did not fall because the news was good. Perhaps they fell because the news was not good after all; perhaps the fall and the goodness or otherwise of the news were unrelated. Either way, the feedback was not accurate. So now, with stocks trading at the highest level in three weeks, overall optimism as measured by the Cognitrend Bull/Bear-Index is at its lowest level since mid-May. Admittedly, renewed interest in German stocks among by non-domestics will be required for the DAX to make a huge jump higher. However, some additional short-covering from those recent bears is likely to help keep stocks buoyant in the near-term.

© 20 June 2012/Christin Stock, cognitrend