Analyzing the German Dax Index: Focusing on Factors That Matter

German Dax Index: Focusing on Factors That Matter

Market Regime Newsletter

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Key Points:

This Market Regime Newsletter was issued on March 10th, 2024

After a robust 6.5% year-to-date gain, the German DAX index is on its way to surpassing the 18,000-point mark.
These gains come despite some less favorable macroeconomic news for Germany, such as an unexpected rise in the unemployment rate and declines in industrial production and factory orders.
Despite the potential for ongoing macroeconomic headwinds, our data still supports the German bull market as it shows a ‘Very High Reward’ market regime for the DAX, a status maintained since early Q4 2023.
Historically, the DAX has shown gains in 90% of instances within a ‘Short-Term Very High Reward’ market regime, and in 65% of cases within a ‘Long-Term Very High Reward’ market regime

Current Market Regime of the DAX

Description of the Current “Very High Reward” Market Regime

Highly positive market regime accompanied by significantly low volatility. Prices consistently show an upward trend, supported by a wide range of well-performing stocks within that market. Even in the face of negative news, the market demonstrates remarkable resilience with such a high positive trend quality. Weak trading days are typically short-lived overbought or sentiment driven reactions, leaving the market better positioned for further gains.

Since November 2023, the German DAX Index has consistently maintained a positive market regime across both short- and long-term perspectives. Since then, the DAX Index has gained 13.5%, despite strong economic headwinds.

Driving Forces Behind the Current Market Regime:

Our research categorizes market trends into six predefined market regimes based on strength and direction. Our indicators cover essential performance factors such as trend, trend quality, sentiment, and the positions of smart and dumb money. These indicators are consolidated into Market Health Indicators, measuring signal positivity across different timeframes for unbiased trend analysis.

The chart below illustrates the German Dax Index in the first panel, followed by three subsequent panels detailing Short-, Mid-, and Long-Term Market Health over time. Scores on a 0 to 100% scale denote signal positivity, with values below 50% are indicating a negative outlook and those above 50% signaling positive sentiment.

While there may be reasons for caution due to negative macroeconomic news, our Market Health Indicators remain strong, indicating continued upward momentum for the DAX. Although temporary consolidation periods may occur, the risk of a major trend reversal remains low as long as Mid- to Long-Term Market Health maintains strong readings.

In addition to identifying strong up- and down-trends, our Market Health Indicators also allow us to distinguish between healthy and corrective consolidation periods. This capability stands as our greatest advantage, given that consolidation phases represent pivotal moments. They can either serve as platforms for further gains or mark the onset of more significant downtrends. Consequently, deciding whether to capitalize on profits, capitalize on potential dips, exit the market, or even adopt a short position becomes challenging in such scenarios.

How to spot high-reward & low risk market opportunities

3 Steps for Determining Market Regimes

With our structured approach, we can identify the respective market regime for any market. Our methodology include the following steps:

1

Identify Robust Trends

Trends are measured through a systematic screening of signals from multiple indicators (for example the WSC Trend Index, the Smart Money Flow Index or the Daily Put-/Call Ratio All CBOE Options)
These indicators cover various categories (trend, trend quality, and sentiment, including dumb- and smart-money positioning) and timeframes.
This diversified approach minimizes the impact of noise in individual indicators and enables an unbiased and robust view of current market conditions.

2

Monitor Market Health

These indicators are representing composites of these signals for three different timeframes.
Scores on a 0 to 100% scale denote signal positivity.
Values below 50% indicate a negative outlook, while those above 50% signal positive market health.
The combination of these health indicators results in market regimes, indicating the strength of the current trend for a specific timeframe.

3

Determine Market Regimes

By combining short- to mid-term and mid-term to long-term market health readings, the specific market regime is determined.
These Market Regime gauges help identify market regimes and shifts without the hassle of going through all indicator signals.
To be more precise, the Tactical Short-Term Market Regime is constructed upon the combination of short- to mid-term market health, while the Strategic Long-Term Market Regime is based on the amalgamation of mid- to long-term market health.

As shown above, healthy consolidation periods are usually characterized by short-term indicators turning negative, while the mid- to long-term condition remains robust. This pattern was evident from May to early July. In such situations, the market often trades sideways, pausing before resuming further gains. The situation differed slightly from August to early September. There, Short-Term Market Health dropped below 50%, while Mid-Term Market Health also started to deteriorate, finally dropping below 50%. This serves as an early warning signal, indicating that the ongoing breather has the potential to evolve into a more significant correction. Indeed, the DAX initiated a stronger correction in September, with Market Health readings declining until late September, before rebounding back above 50%, indicating a forthcoming stronger rally.

Currently, Short- to Long-Term Market Health Indicators are trading at robust levels across all timeframes. This indicates persistent strength among numerous indicators such as MACD, RSI, stocks above 20/50/100/150/200-day moving averages, new highs vs. new lows, smart money positions, and other sentiment indicators such as call-put ratios and sentiment surveys. This reinforces our optimistic outlook – at least until mid- to long-term Market Health continues trading above 50%.

These positive Market Health Readings are also reflected in our Market Regimes Gauges below. By combining short- to mid-term and mid-term to long-term market health readings, the specific market regime is determined. These Market Regime gauges help identify market regimes and shifts without the hassle of going through all indicator signals. To be more precise, the Tactical Short-Term Market Regime is constructed upon the combination of short- to mid-term market health, while the Strategic Long-Term Market Regime is based on the amalgamation of mid- to long-term market health.

What the history tells us about the current Market Regimes

Since the availability of full market regime data dating back to 1995, the DAX has entered a ‘Very High Reward’ Market Regime 354 times from a tactical point of view and 137 times strategically. These market regimes are categorized by Short- To Long-Term Market Health Readings above 50%. Remarkably, in 90.4% of these instances, the DAX yielded a total cumulative gain of 888% for short-term traders and 388% for strategic long-term-oriented investors. The most substantial gain recorded within these occurrences was an impressive 28.1% for tactical investors and 56.9% for strategic ones.

The Bottom Line

With consistently positive Short- to Long-Term Market Health Indicators, the outlook for the German DAX remains compelling.
The uptrend is still supported by a broad range of stocks in the index, increasing smart money positions, and cautious sentiment due to negative macroeconomic factors. These are the main ingredients for a robust uptrend.
Therefore, any potential weaknesses ahead are likely just temporary pauses on the way higher – provided that Mid- to Long-Term Market Health Indicators continue to show strength.