Four market watchers, who correctly predicted the performance of the DAX stock exchange for the last three years, now warn that the index will fall to 8,000 points this year.
Handelsblatt has asked a group of four analysts, who derive their predictions from price developments and trend-following models, to forecast the movement of the DAX exchange of Germany's top 30 listed companies, since 2013. They correctly foresaw a 25 percent jump in 2013, a bullish 2014, and said correctly that the index would hit 11,000 in 2015.
This time they tell a bleaker tale: The DAX, which closed at 9,545 on Friday, will continue to fall to 8,000 points, they said.
Though none of them thinks all of those losses will come in a sudden landslide or that the kind of volatility seen since the beginning of January will continue. In just two weeks this month, the DAX lost more than 11 percent.
"An abrupt upward countermovement is possible and likely to come at any time," said Dirk Oppermann of DZ Bank. But his message is: "Investors should use periods of recovery to sell shares and build liquidity."
It's a far cry from the near-12,000 prediction made by analysts surveyed at the end of last year.
2016 is certainly not the year of the stock. Frederik Altmann, Market Analyst
For these forecasters, that's because – and this is the second message – "2016 is certainly not the year of the stock," according to the independent expert Frederik Altmann. “The risks have increased enormously."
These risks are not so much the weakening growth in China, the weakening global economy and the many current geopolitical risks, though these are fundamental forces that are undoubtedly having an effect on the exchanges. What concerns the four experts most is a "negative divergence in the price charts."
Furthermore, typical flow indices that reliably anticipated stock market ups and downs in the past had already moved downwards in 2015. This included the global index of semiconductor stocks. Because companies across a range of industries need semiconductors for their goods, stocks like Intel and Infineon serve as a canary in the coal mine for the markets.
The same applies to the "Dow Jones Transportation" index in the United States, which includes large logistics and transportation stocks. This, too, turned downward early last year.
In addition, experts are skeptical of the rapid and long-lasting decline in prices for raw materials. And they’re not just thinking about the closely watched oil prices. If industrial businesses are requesting less copper, silver or platinum, this indicates their low order volume and a slowdown of the global economy.
The ailing stock markets in countries such as Brazil, Russia and China should also give investors pause. The more emerging market countries in crisis, the fewer orders there are for companies in the western industrial nations -- precisely because they erode the markets. Therefore rates in emerging markets usually decline first, followed by Western Europe and Wall Street.
Finally, the small market breadth indicates a need for caution: a few large market cap stock market winners, like Microsoft, Apple and Facebook, stand opposed to the many stock market losers last year. Similar warning signs were seen in 2007 and 1999. In both cases, there was poor market breadth from a few rising shares -- in the DAX in 2007 it was Deutsche Telekom and SAP, while in 1999 it was Mannesmann -- and many falling stocks that signaled the impending recession. Between March, 2000 and March, 2003, the DAX fell by 75 percent, in 2008 it fell 40 percent.
The experts don’t see the German stock market falling so deeply this time. "The DAX will decline to at least 8,150 points," estimated analyst Klaus Deppermann, with a "correction minimum" for 2016. The four experts don’t agree on the exact number of the market drop, but none of them sees the DAX falling significantly lower than 8,000.
At 8,000 the DAX will have lost 35 percent since its high in April last year, but experts believe that level is sustainable.
"8,000 points should start to generate enough demand," said Christian Henke from IG Group. Adding to this confidence is the fact that there are no real alternatives to stocks. "With bonds, savings accounts and money market accounts, investors get virtually no interest."
There is one condition under which the experts think the DAX will stop dropping before it hits 8,000 points and turn sharply upwards again. “If the central banks in Europe or the U.S. decide to buy back stocks in addition to bonds in order to support the stock exchanges, then the stock markets would turn dramatically upwards,” said DZ Bank expert Mr. Oppermann.
Japan's central bank already does this, so while it would be unusual, it would not be totally taboo for Western central banks to do the same. However, the experts do not believe this kind of central bank share purchase will create a sustained turnaround upwards and the beginning of a new, strong bull market.
"Politically manipulated markets do not succeed in the long run," Mr. Oppermann said.
Ulf Sommer covers companies and markets. To contact the author: [email protected]