Here's Why Germany Matters

JC Parets
October 3, 2018

There is a lot of noise being made this week about potential divergences in U.S. Stock markets. The one thing that gets lost in the shuffle is that just because asset A is rising and asset B is not keeping up, that asset A needs to correct and come down to meet asset B. Rarely does it get mentioned that asset B can just get some rotation and catch up to the relative strength that asset A is showing. In fact, during bull markets (which we're in, not sure if you heard) the latter is a perfectly normal occurrence.

Today we're going to take a look at a more macro correlation that I think we need to be watching. We're talking specifically about the long-term behavior patterns of the S&P500 in America and the DAX in Germany. Going back many decades, these two indexes really move in sync.

Here is a chart of S&Ps with the DAX. Notice the peaks in 2000 & 2007, the breakout in 2013 and similar peaks in 2015. More recently, S&Ps have been making new all-time highs and the DAX is near 52-week lows! Something's gotta give:

Below is a closer look at that German DAX putting in what some chart observers might call a Head & Shoulders Top. The thing with these patterns is that they rarely work. Because markets trend, obsessing over reversal patterns defeats the entire purpose of why we're here in the first place: to identify trends. These type of patterns normally end up just being continuation in nature, because that's how markets work. We saw a similar phenomenon in Retailers last Summer right before prices exploded higher.

So the question is simple: Is this a massive Head & Shoulders top in DAX which will lead U.S. Markets lower? Or are we just near the lower end of the range and now Germany plays catch up to the U.S.?

I'll tell you how I feel about this and then you can come up with your own conclusion. While I agree that a completion of a multi-year top in German DAX is a negative for U.S. Equities, and stocks around the world for that matter, we have not completed anything. To me, we're just near the lower end of the range. I believe we have to treat this as innocent until proven guilty.

Now, if we're below support from the past 2 years and this actually is a massive Head & Shoulders Top, then we can talk. Until then, I'm in the camp that Germany is still within an ongoing bull market and likely sees rotation into their stock market.

- JC

 

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