analysis
Falling stock prices Crash on rates in the DAX? The DAX has been going downwards for weeks – little by little. Experts speak of a “salami crash.” What are the reasons for the price decline, and does the DAX now have a chance of a real recovery?
Strong nerves: This is what investors in the German stock market particularly need at the moment. The German stock index fell below the 15,000 point mark in the middle of the week for the first time since March. Since then he has been trying to stabilize himself. The balance of the past few weeks is bleak: since last Friday alone, the DAX has lost a peak of 3.7 percent. Since the all-time high of 16,529 points at the end of July, losses have even amounted to 9.6 percent.
What is striking is that you will look in vain for trading days with spectacularly high price drops. Rather, the current downward movement is a longer-term trend. Over the past few days and weeks, the DAX has repeatedly suffered small to medium-sized declines, often punctuated by short interim recoveries. In such a case, experts speak of a “salami crash,” in which the downward movement occurs “in small slices.”
Rising bond yields, falling stock markets
Above all, it is the rapidly rising yields that are taking the breath away from the stock markets. In the USA, the yield on ten-year government bonds was at 4.9 percent in the middle of the week, a 16-year high. In Germany, the ten-year yield exceeded the 3.0 percent mark for the first time since 2011. For comparison: four weeks ago it was 2.6 percent.
The background to the rising yields is the changed monetary policy perspective: In order to get the stubborn inflation under control, the US Federal Reserve Bank and the European Central Bank (ECB) are likely to leave interest rates at a high level for a longer period of time. However, if bond yields rise, this makes stocks less attractive compared to bonds. Why should investors take unnecessary risks on the stock market when they can safely get three percent or more on the government bond market?
Oil prices are a concern
Additional pressure on the stock markets has come from the oil market in recent weeks: prices there have recently risen to highs lasting several months. The North Sea variety Brent was temporarily trading at just under the $100 mark. Price drivers were supply concerns, as the producing countries Saudi Arabia and Russia keep supply artificially tight. In addition, US inventories fell sharply.
In the past few days, however, the pressure from the oil market had noticeably eased, with oil prices temporarily falling to their lowest level in a month. The oil market is gradually becoming convinced that a global economic downturn will also significantly reduce demand for black gold. The upward trend in oil prices has broken, explains Robert Rethfeld, market expert at Wellenreiter-Invest.
DAX with lousy chart technology
This, combined with the recent slight decline in bond yields, offers the stock markets the opportunity for a countermovement. “In order for this to develop into a recovery, further gains would have to follow,” emphasize the chart technology experts at UBS. According to Helaba analysts, the DAX has a chance of recovering from a recent “oversold market situation”. In general, they see the German leading index as still being in poor technical shape.
In fact, the chart technology in the DAX had recently deteriorated massively; the defaults had fallen below their key support zone: the July and August highs. With the slide below the 200-day line, the moving average of the past 200 trading days, the long-term prospects for the DAX have also deteriorated drastically. The next important support zone is now at 14,800 points – here the prices have often returned to the curve in the past.
Negatives Investor sentiment as Contraindicator
Investor sentiment is currently at rock bottom. This is shown by a look at the “Fear & Greed” index from the news channel CNN, which is only 18 out of 100 points and is therefore in the “extreme fear” range. Quite a few market observers see this as a counterindicator, i.e. a harbinger of rising prices, because: If the mood is so bad that everyone has already sold, no new selling pressure can arise. This opens up the chance of a recovery rally in the DAX. This could happen violently and erratically.
Possibility of a short squeeze
The background is the numerous short positions that the players on the futures market had recently built up. If the prices start to rise, the short sellers have to frantically buy the DAX to cover their positions – and thus drive the DAX further up. Experts then speak of a “short squeeze”.
The US labor market report due this afternoon could possibly provide an opportunity for this. The motto is: Bad news is good news. Weak job data would show that the Fed’s monetary policy braking is finally having the desired effect. As a result, the rally in bond yields could come to an end, which in turn would give the stock markets a chance for a real recovery.
Hoping for the best six months on the stock market
However, given seasonality, a sustained recovery in October could be difficult. The stock market month is “known for its crashes and panics such as the banking panic of 1907, the global economic crisis of 1929 and Black Monday of 1987,” warns Konstantin Oldenburger, market analyst at CMC Markets.
In fact, from a statistical perspective, it’s usually only worth getting back into the stock market after Halloween, i.e. November 1st – that’s when the best six months on the stock market begin.