pfp Advisory: "DAX close to all-time high, but most stocks not"

Fund manager Christoph Frank points out that although the DAX has chased records, only a few of its members, let alone the second and third tiers, have done so. The bull market is therefore on a shaky foundation.
 

29 April 2024. FRANKFURT (pfp Adisory). Even though the DAX has not been as strong in April as it was in the first quarter, it has recently remained above 18,000 points and within striking distance of the record high it reached at the end of March. In the weeks and months prior to this, Germany's best-known share index had been churning out new all-time highs like an assembly line.

This series of records may come as a surprise, as it took place in a rather unfavorable environment: Germany's economy is barely growing, German politicians are acting rather hostile to the economy and capital markets and interest from foreign investors is limited. But once again it is clear that the German economy and the German stock market can develop quite differently. At least this applies to the large corporations that are active on the global markets and therefore not so dependent on their home country.

Although that's only half true at best. I should actually put it more precisely like this: This applies to the index, which tracks the large corporations active on the global markets. However, if you dig deeper, you soon realize that, unlike the DAX, not even half of its index members, not even a quarter, have reached an all-time high this calendar year. In other words: The record chase at index level is only reflected to a very limited extent in the individual stocks.

Specifically, according to my analyses, just nine DAX members have reached a new all-time high so far this year (up to Friday), 31 have not. Such a high rate of “record deniers” is generally not a good sign. For me, this brings back memories of the new economy bubble at the turn of the millennium, when the DAX, which at the time consisted of only 30 stocks, was pushed up by just a handful of shares, while the broad market had been weak since 1998.

In 2024 to date, it is also noticeable that the supposed record chase is limited to a few highly capitalized stock corporations. Neither the MDAX as a barometer for medium-sized companies nor the SDAX as a representative of small companies have reached new all-time highs in 2024, nor are they anywhere near their record levels from 2021. A paltry 12% of all MDAX members reached a record high in 2024, while the figure for the SDAX is a meagre 7%. Or vice versa: 88% and 93% respectively did not make it. So nobody should be surprised if they missed out on the few high-flyers in these indices.

The following can therefore be said for the German stock market: The DAX is trading close to its high, but most of its members are not, and there are only a few all-time highs among the securities in the MDAX and SDAX. Overall, therefore, few shares are involved in the current upward movement, and the so-called market breadth is mediocre at best. This is not a good sign. After all, a bull market is all the more stable the more individual stocks are involved, ideally including many new all-time highs.

In an optimistic scenario, the upswing will become broader and gradually include medium-sized and small companies. In this case, the upward trend would have a much more stable foundation. Or, in a pessimistic scenario: the driving forces of the rally to date run out of steam and the rest of the herd proves too weak to “jump in” and save or continue the bull market.

By Christoph Frank, 29 April 2024, © pfp Advisory

Christoph Frank is Managing Partner of pfp Advisory GmbH. Together with his partner Roger Peeters, the expert, who has been active on the German stock market for over 25 years, manages the multi-award-winning stock picking fund DWS Concept Platow (LU1865032954), which was launched in 2006, and pfp Advisory Aktien Mittelstand Premium (WKN A3CM1J), which was launched in August 2021. Further information at www.pfp-advisory.de. Frank writes regularly for the Frankfurt Stock Exchange.