DAX: A test of strength between bulls and bears

Although the DAX recently embarked on a dynamic countermovement, it is clear that there is light and shade both in economic terms and on the corporate side. Nevertheless, these strong price movements create the best trading opportunities. Investors will find the right solutions for long and short speculation on Swiss DOTS, Switzerland’s leading OTC marketplace for leveraged securities.

The latest trading signal on Germany’s DAX stock index was clear: short. The 100-day average crossed below the 200-day line in what technical analysts call a “death cross”. While this is an important trend indicator, fans of technical charts did not reckon with the fundamentals. At the exact moment the death cross appeared, the USA published surprisingly good inflation figures that eased fears of further interest rate hikes. What’s more, “rates may have reached their peak. The next interest rate change will be downwards,” VP Bank chief economist Thomas Gitzel succinctly suggests.

Uncertainty over technical charts

The DAX initially responded to the latest interest rate predictions by making significant gains, but it was not long before the countermovement began, with Germany’s 40 blue-chip stocks reaching their most recent interim low of around 14’630 points on 23 October. This is a proven support level for the DAX, which previously moved upwards from this point in March of this year. Yet despite this turnaround, a death cross appeared at the end of October, which begs the question: how much significance does this event actually carry?

One thing is certain: investors who took their cue from this trend indicator recently have been spared significant losses. When the 100-day line crossed the 200-day average on 28 February 2022, the DAX was at around 14’400 points. Blue-chip stocks then slumped to below 11’900 points, a loss of just over 17%. However, there have also been several false alarms in the past, as in April 2020, when the death cross that appeared was rapidly contradicted by a buy signal in the form of a “golden cross”.

Falling inflation…

Right now, the market strength created by macroeconomic developments seems to be overshadowing everything else, with even the latest US producer prices pointing to declining inflationary pressure after a fall in the US inflation rate. Meanwhile in Europe, inflation in the UK dropped to its lowest level in two years in October, bolstering hopes that central banks will pursue a less restrictive monetary policy.

“The better inflation picture in both the UK and the US suggests that we may start to see a fundamental shift in investment decisions,” said Stuart Cole, chief macro economist at Equiti Capital, adding: “The worst is potentially now over for both bonds and equities.”

…weak economy

On the other hand, the reporting season in Germany has been extremely mixed. Heavyweights such as SAP, Mercedes-Benz and BASF have posted far-from-convincing results, while Bayer continues to grapple with problems of its own making and VW even provided a negative highlight by issuing a profit warning. And let us not forget Siemens Energy, who now require government support after reporting losses in the billions. Nevertheless, there have also been some positive reports, with energy providers E.ON and RWE as well as Münchener Rück among the standout performers. How corporate profits — which have a considerable influence on share prices — continue to evolve will depend largely on further developments in the German economy, which contracted by 0.1% in the summer and may, according to some estimates, enter a technical recession in the current quarter. Yet, even here, the outlook provides some pinpoints of light among the gloom. According to the Leibniz Centre for European Economic Research (ZEW), market players were less pessimistic about German economic prospects for the fourth successive month in November, with the relevant barometer rising by 10.9 points to +9.8 points to move back into positive territory for the first time since April. “These observations support the impression that economic development in Germany has bottomed out,” commented ZEW President Achim Wambach. Yet not all experts are equally optimistic. “The economy is still walking a well-trodden tightrope between modest growth and declining GDP. There is no more to it than that at present,” said VP Bank expert Gitzel.

Investment solutions

This mixed outlook means it is not currently easy to pick a side, with compelling arguments for both bears and bulls. However, the DAX’s dynamic movements clearly suggest that an array of trading opportunities are available. The current positive momentum can best be exploited using a long factor certificate.

Short-term movements enable these securities to most effectively exploit their advantages, which range from a constant leverage to pricing that is independent from volatility and term considerations.

Swiss DOTS features more than 7’000 leveraged products on the DAX, around two-thirds of which are long instruments. One product that might suit those of a bullish nature is the factor certificate (Valor 117507242) from Société Générale. This open-ended product has a leverage of 14. If the DAX manages a breakout past its resistance zone of 15’800 points, the next target zone is around 16’000 points. Anyone who is bullish on the DAX over the longer term should opt for a warrant. The call warrant (Valor 127891809) from BNP Paribas with a term running until March 2024 would be a good choice here. The strike for this instrument is at 16’250 points, which means the warrant is still out of the money. It has a leverage of 16.9 and therefore offers the potential for significantly above-average returns.

If the current rally is initially followed by losses on the DAX or if the movement back above the 200-day line turns out to be a false alarm, the constant leverage certificate (Valor 121105752) from Bank Vontobel would be a suitable product. This open-ended instrument is equipped with a constant leverage of 12. In the event that the downward movement is likely to last longer, the short warrant (Valor 124119358) from BNP Paribas with a leverage of 18.5 and a strike of 15’500 points would be a good choice.

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