Dax sentiment: The stock market rally could accelerate in the short term

The Dax has had an extraordinary surge. Since mid-July, the German benchmark index has gained more than 1,600 points and set numerous new records. At the start of the week, the stock market barometer is hovering just below its previous high. The record hunt is making the Dax susceptible to larger profit-taking. Since mid-July, there has only been one trading day with a significant decline.

According to the latest evaluation of the Handelsblatt survey Dax-Sentiment, sustained setbacks are unlikely in the short term. On the contrary, the stock market rally could even accelerate further. For the Dax-Sentiment, Handelsblatt surveys around 10,000 private investors about their market assessment before the weekend. The responses are evaluated by Stephan Heibel, the owner of the analysis firm AnimusX, and supplemented with additional indicators.

Despite all declarations, an agreement in the Iran war is not imminent. However, while oil and gas prices remain above their pre-war levels and drive inflation, one Dax record follows the next. The many resistances are currently having little impact on the Dax. Private investors are therefore in a good mood. Investor sentiment (sentiment) has risen sharply again, from 1.3 to 4.2.

Since mid-July (minus 3.5 points), the mood has successively improved. The weighted five-week average is now also just in the positive range. Values above four are generally considered a warning signal in sentiment theory. Behind this is the assumption that if many investors are optimistic, they have already invested. Then there are only a few left who can still buy and drive the prices up.

If investors are therefore extremely euphoric, it significantly increases the danger of a soon-to-come setback. However, Heibel gives the all-clear for now. In the past, only five-week average values above 20 points were a sign of an overheated market sentiment. The market is currently still far from this.

"That means everything is in the green area," says Heibel. With the change in sentiment, uncertainty has also dissipated. Self-satisfaction is 1.8 points, positive for the first time in four weeks. This indicator captures the extent to which the survey participants were surprised by the market development of the previous stock market week.

Unlike in previous weeks, more than 70 percent of those surveyed now state that their expectations were "fully and completely" or at least "largely" fulfilled. The rally is currently being driven by a larger group of investors. Consequently, the cash ratio has also decreased significantly, according to AnimusX data. For expert Heibel, this is an "extremely bullish signal," i.e., an indication that the prices will continue to rise.

This is because comparatively low cash ratios have only occurred seven times in the past. According to Heibel's calculations, the Dax was on average more than 11 percent higher in the following six months. When such strong increases occur as in the past few weeks, investors are often less optimistic. This time it is different: they apparently consider the rally to be correct and expect it to continue.

The future expectation only decreases slightly to 1.9 points. The same applies to the willingness to invest, which is still in the moderately positive range at 0.8 points. Somewhat surprising is the persistently high inclination to hedge. Many private investors still hold options on the futures market to insure themselves against price losses.

This is shown by a look at the Euwax sentiment of the Stuttgart stock exchange. Here, private investors are primarily active.

Call options can be used to bet on rising prices, while put options can be used to bet on falling prices. The Euwax sentiment sets the number of these options held in relation. Dax: A short squeeze is conceivable. The increased hedging inclination was already present before the start of the rally. Despite the record hunt, only some of the investors have dissolved their positions in the past few weeks.

If the prices fall and the hedges are settled, the prices will be stabilized as a result. If, on the other hand, the positions are dissolved into a rising market, the upward trend will be further reinforced. The technical term for this is a short squeeze.