Here's Why Germany Matters
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