DAX recommendation reverts to neutral

Price at time of writing – 9290.

The DAX's momentum above 9200 has stopped out short positions recommended at 9048 in my update earlier this month.

As I suggested at the time, there was a higher risk than normal in this tactic, stemming entirely from the fact that a number of other global indices – notably the US Dow – had yet to achieve their own upside targets. This lack of correlation would naturally create some headwinds. In the meantime, my DAX recommendation reverts to neutral.

This overshoot has been triggered by comments last week from the European Central Bank's (ECB) Estonian council member, stating that the ECB stands ready to cut borrowing costs further. This had the impact of weakening the euro, an event which always benefits the powerhouse exporting nation of Germany more than most. It seems a bit rich to me, however, given that eurozone interest rates are already just 0.25%. Arguably, another miniscule cut to a level closer to zero is unlikely to change consumer behaviour very much. It could also antagonise those old Bundesbank members of the ECB council who have always resisted such ‘imprudent’ monetary behaviour.

However, I believe the ECB (and the US Federal Reserve, too) is right to be fighting deflation tendencies. In my view, deflation is still embedded in the global economy, and remains our biggest battle to overcome in the years ahead. Interestingly, and probably more importantly, the Estonian member made a further comment stating that the central bank is technically prepared to make its deposit rate negative. This would have the effect of charging banks to hold their excess cash with the ECB, punishing them for not lending these funds for the greater good of the collective economy. We may well be living in times when retail customers of high street banks could also be charged a negative interest rate for accumulating cash in bank deposits. This would really concentrate some minds.

Even if the DAX were to go higher, a re-test of the 8942-9048 band would be required before long. It is on this re-test that the next move on the index will make itself clear.

Recommendation: neutral. The DAX remains the index on which to stay short for those wishing to hedge long positions elsewhere.

German DAX chart

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