Perhaps the most important lesson for investors is to realize that the game has changed: what has been true for years is now only limited! The sooner you take note of this, the better – because rising bond yields make money more expensive and thus increase the risks on the stock markets, whose fuel was cheap money and ample liquidity. These times are now over, a new wind is blowing!
This does not mean that we are now entering a bear market quickly! But: we are facing weeks, and probably even months, in which the volatility we have seen recently will not simply disappear again! The times of Wall Street’s continuous rises with minimal volatility are now over, making new all-time highs in the stock markets extremely unlikely in the near future! This is likely to remain so until April/May, only then will the chances be good that the rumble has subsided and the focus of the markets will return to the improved margins of US companies following the US tax reform.
Until then, however, one must remain cautious – and flexible in mind. It is very likely that yields on the bond markets will continue to rise – until consensus prevails that yields on the bond markets will continue to rise, i. e. that there will be a countermovement when everyone is once again positioned too one-sidedly. That was exactly what happened on the stock markets, and that should lead to further stress on the stock markets, because many of them will have to reduce their overly one-sided positioning! Leverage is now the magic word, as well as the word “liquidity”: this is becoming increasingly scarce, and the prospect of deleverage is actually poisonous for the stock markets (in the short to medium term window of time).
So what to do?
In our opinion, if we assume that this deleveraging is coming, we should rather sell recoverys in the stock markets. One should therefore, in a word, voluntarily do what others are forced to do in order to get rid of the leverage: buy the dollar, sell excessively steep rises on the stock markets because others will use these rises to reduce their excessive long positions!
And the Dax? The index is likely to perform better than Wall Street because of the strengthening dollar, for which a strong dollar is a problem. The stock markets on the periphery of the Eurozone are likely to perform better than the Dax, because the tone of Germany will change when an SPD member is a finance minister (this is already evident in the bond markets, where bonds issued by the periphery of the euro develop better than the German federal bond).
The DAX chart shows that we’re seeing a technical reaction to the previous sell-off, but the picture is still very bumpy. There may be an increase to the next higher resistance level at 12645 points, maybe even up to 12880, but the better chances in the next few weeks are on the downside, especially if the 12340/50 and the 12140s break.