Dax: Biggest drop in sentiment since Corona crash

A week ago, I wrote as a conclusion of the sentiment analysis that I lacked the imagination to see what could cause further price increases in the DAX. The election results in Saxony and Thuringia are being interpreted as negative for the economy. This was followed by the news that VW was considering plant closures for the first time in its history, and that Intel had to save money and the planned production facility in Magdeburg could be called into question. After all, Intel wants to invest 32 billion euros there, and Robert Habeck would contribute 10 billion euros in subsidies from taxpayers' money.

DAX: Biggest drop in sentiment since Corona crash

Before we knew it, the DAX was at -2% and was unable to recover from that during the rest of the week. Investor sentiment plummeted accordingly to -3.4%. Compared to the previous week, the delta is -7.7% points, the biggest drop in sentiment since the Corona crash.

No wonder that uncertainty is setting in, the corresponding sentiment value falls to -3.3%.

If prices fall, they can rise more strongly later, many investors probably think. Because future expectations have jumped to +4.7%, the highest value in a year.

But if you remember the willingness to invest, and the associated cash ratio, from the previous week, then it will not surprise you that despite the great optimism for the future, hardly any investors want to invest. The willingness to invest in the DAX only rose by +0.4%, which was not surprising because investors said a week ago that they hardly had any cash left.

Investors are also heavily invested and were surprised by the sell-off. The insurance is great, but hopes that DAX prices will soon rise again lead to… well, I'll call it “purposeful optimism”.

The Euwax sentiment of private investors collapses to -12%. Investors buy hedging products that benefit from falling prices in order to protect their high investment ratio.

Institutional investors who hedge via Eurex have also increased their put purchases. The put/call ratio has risen to 1.8, which is still very low on an annual basis, but has risen significantly since mid-July (1.7). The more puts are bought, the higher the put/call ratio rises.

At the CBOE, the put/call ratio jumped to 0.98, which represents a significant increase from the previous week. In the USA, too, investors were shocked and are now buying put hedges that were considered superfluous just a few days ago.

The US fund manager's investment ratio falls by 11 percentage points to 71%. The bull/bear difference among US private investors falls to 20 percentage points. But both the bull and bear camps lose out to the neutral camp.

The technical Fear & Greed indicator of the S&P 500 shows a neutral condition at 46%.

Interpretation of the DAX sentiment

The mood on the stock markets is bad, there is no doubt about it. The increased purchases of hedges are constructive and optimism about the future can therefore increase. Once again we have to ask ourselves whether this is a short breather in an intact uptrend or the beginning of a full-blown correction in the DAX.

The sharp rise in optimism about the future suggests that we should take a breather. From a technical perspective, the purchases of hedges are also a good sign. From my preliminary animusX data, I see that the short quota has also risen significantly. These are positions whose liquidation could provide further impetus for the stock markets in the event of positive developments.

However, if we are dealing with the beginning of a full-blown correction of the DAX, then the large difference in sentiment between the current mood (-3.4%) and future expectations (+4.7%) is too great. A correction only ends when the last optimists give up. However, there is no sign of that yet.

Perhaps a closer look will help: next week, the US Federal Reserve will probably lower the key interest rate for the first time in four years. This will change the general conditions for companies: low interest rates are good for companies with high financing costs for investments, such as industrial companies. At the same time, interest rates are being lowered because the economy is weakening, which causes investors to reflexively buy shares in utilities and real estate companies. Suppliers of products that are in demand regardless of the economic situation: electricity suppliers, telecoms, real estate companies, etc.

The mega-tech companies, which have been the only alternative for investors in recent years due to high interest rates, are now also facing competition. Accordingly, investors will raise fresh capital by selling the previously successful mega-tech stocks and investing part of it in industrial and utility stocks.

From this perspective, we are currently seeing nothing more than an adjustment to the new conditions, a rotation. Since in recent years only mega-tech companies have been reported on, and in recent weeks only Nvidia has been felt, their sell-off looks like a crash.

But Vonovia shares gained 5.4% this week, E.On +3.4% and Deutsche Telekom +2%. In the Dow Jones, Procter & Gamble with its everyday household goods leads the list of weekly winners with +3.5%, followed by Travelers, whose credit customers benefit from falling interest rates.

Given the visible rotation, it is of course difficult to make a statement about an index such as the DAX. Accordingly, sentiment analysis cannot be used to make a directional decision this week.

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