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DAX – UPTREND TILL JULY & SUBSEQUENT FALL
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It all started to fall apart yesterday afternoon. Ze BigBoyz were selling, and selling hard, with the DAX losing 4% in thefirst hours of trade. The DAX is of course the biggest target now, has itnot defied any gravitational pull from any corrective phase in the first halfof the year. Even the Japan disaster was a one-day affair, rectified inthe shortest possible time.
The latest fall from grace
Since early August, the DAX dropped 25%, the biggest fall of indicesworldwide, – making up for all the corrective phases that did not produce the’desired’ effect. By comparison, the STI is in a down trend, which started in November 2010. The final, but equally abrupt drop of -12.5% inthe Singapore index was therefore benign by comparison.
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STI – DOWNTREND SINCE NOVEMBER 2010
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I have chosen to compare these two indices, as representative of two major economic realities: ECONOMIC MISMANAGEMENT. = DAX and ECONOMIC GROWTH, = STI.. What separates them is a self induced debt burden in Europe and US, while Asia is very much a healthy, thriving economic powerhouse.
Such divergence in trends should put caution at the forefront of our investment decisions. A realignment into a common trend was therefore only aquestion of time, and that is NOW.
While the DAX could easily come down another 10% without negating theoverall positive trend, the STI is at a level of what I call ‘maximumretracement’ (76.4% Fibonacci) of the upside last year. It should – mustreally – hold for a beneficial early turnaround in the index. If thelevel around 2776 is indeed breached, the correction could be extended by atleast another 6% downside, – but also put in doubt the generally positive outlook forAsian businesses.
Preferred short term outlook
Once the ‘bottom’ is in, the emergence of a new trend with hopefullycorrected and amenable debt levels in US and Europe, a new Syrian government, Libya without a Qaddafi, (more liberating events in due course) is onthe cards. Then we could be buying world equities at a discount of some +20%.That is a focus I would like to provide for my investors, rather than thedoomsday media circus that we see prevalent today.
Cyclically, an end to the current down trend should only be weeks away, with September to watch for early technical signals. Just in case you are living in the false hope that the world returns to a Goldilocks scenario soon, be forewarned. We, – that is the skilled allocation advisors, may still be able to attain good growth performances for our portfolios but the emphasis will be on wealth preservation (also in light of inflationary pressures). Fundamentally, there are a number of indicators, such as less pressure on inflation, better corporate earnings, more jobs (in the US predominantly), which suggest that by last quarter market sentiment should return to more sensible levels.
For more outlook on other markets, watch this space.
