#$dax

Cheers to the German market! After a mid year swoon it was able to recover and post a solid 11.5% gain for 2017. What better reason for Angel Merkel to celebrate with a small mug of beer? No need to tell her that much of the rest of the world, including the US markets, were up substantially more. A gain is a gain right? But what is in store for the German market for 2018 and beyond? Brexit remains an uncertainty and now tax cuts in the US make the competitive landscape tougher.

With all this uncertainty the only truth is in the price action. The chart of the German DAX Composite below tells a strong story. The first thing to note is the rounding higher in the chart. The curved red line shows a series of higher lows that indicate acceleration in the trend higher.

The first bullish point was in 2013 as it broke an ascending triangle higher. That gave a target to about 13,500. As it continued to move higher into 2015 it completed a bearish Deep Crab harmonic (the two triangles) and pulled back a nearly perfect 38.2% before reversing again. Where was the 38.2% retracement? Right at that ascending arc.

I’m lucky in that I learned early in my career that we’re in a global market place. The United States, while it is certainly important, is just one country within a massive interconnected global market. We see this more and more every day. Many choose to focus on US Stocks, and that’s fine. But I think even if that’s the case, approaching the market globally is not only an advantage, but becoming more of a necessity with each day that passes.

Today I want to share a chart that really tells an interesting story about what is actually happening in stocks around the world. I’ve taken the 10 largest exchanges in the world, including both developed and emerging markets, and equally-weighted each of them to create an All Star Charts Top 10 Global Exchanges Index. You can see embedded in the chart, the exact list of components:

Notice how we peaked in October of 2007 and then retested those highs the following summer when some of these markets still had one last gasp of breadth, particularly in Energy and Emerging Markets. This index then peaked near that same level in the Spring of 2015. After 18 months of further digestion of supply, this equally-weighted basket of global indexes is now breaking out through that resistance to new all-time highs.

Anyone who tells you that new highs are a bad thing is lying to you. Stocks in downtrends, by definition, do not close at all-time highs. Watching this massive breakout occurring over the past month is one of the things that has kept me more structurally bullish towards equities as an asset class.

Looking shorter-term, here are prices of this index breaking out above both the Spring 2015 and October 2007 highs. Again, new highs are a characteristic of uptrends, not downtrends. Momentum has not hit oversold conditions in over a year since putting in that bullish divergence in early 2016, which is also a characteristic of uptrends, not downtrends:

The way I see it, if prices of this index are above the 2007 highs, it is awfully difficult for be to be bearish of equities. I think this is heading another 10-12% higher towards 193,000. Let’s remember that this includes, not just the U.S., but Europe, Japan, London, Australia, Hong Kong, China, Canada and Brazil. In my opinion, this is just another feather in the hat for the stock market bulls. From a risk management perspective, if we see the price of this index falling back below the 2007 highs, then we’ll have to reevaluate this bullish thesis. I believe this is the lower probability outcome, and a continuation of trend is much more likely. But I pride myself in keeping an open mind and the market has given us a clean level to use as a reference. For now, I still want to be a buyer of weakness, not a seller of strength.

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Cheers,

Like many equity markets globally, the German DAX is testing critical trend support stemming from the 2009 lows.

Another day, another mega-trendline being tested in the global equity markets. Considering the bevy of trendline encounters around the world, it has become Trendline Week here on the blog and on Twitter (@JLyonsFundMgmt). And we’re not talking about obscure markets either. For example, we’ve already highlighted critical support tests for the STOXX Europe 600 and Japanese Nikkei 225 indices this week. Today’s featured trendline pertains to -- the German DAX.

Considered the engine that runs the Eurozone, it is not surprising that the German DAX would strongly resemble the STOXX 600. As goes the German market, so goes the Eurozone, it is thought. And while there is probably a lot of truth to the notion, the 2 markets are not 100% in lock-step. As a matter of fact, Germany only has the 4th highest weighting in the STOXX 600, behind Great Britain, France and Switzerland. Also, consider the fact that while the STOXX 600 was in the process of making essentially a multi-decade Triple Top in the past few years, the DAX was consistently hitting all-time highs from 2013 to 2015.

That said, the similarities are unmistakable and Germany’s influence undeniable. Considering the charts, the DAX trendline is basically the same as the one we highlighted on the STOXX 600. Specifically it’s the Up trendline stemming from the 2009 lows that tracks the bull market of the past 7 years (the only difference is that the DAX chart is drawn on a log scale, which makes its meteoric rise even more impressive).

The idea is obviously the same as with the STOXX 600. It is a trendline so let’s keep it simple and not over-analyze things. Above the trendline is bullish for prices. Below it is bearish. And presumably -- assuming it holds -- when prices drop to test the trendline, it is a “buy” signal.

Now, for you day-traders, we apologize but the actual trendline touch occurred 2 days ago, on Monday (we had to pick 1 market each of the past 2 days and we settled on the STOXX 600 and Nikkei). Therefore, if you were looking to trade the DAX for a bounce, you’ve already missed it as the index has popped close to 5% in the 2 days since. This is not to say the DAX cannot rally more. Indeed, while it is not our forecast, the trendline is significant enough to produce another strong intermediate-term rally, as it did following touches in 2011 and this past February.

FYI, on Monday, the trendline (an inexact art, btw) was in the vicinity of 9205, according to our work. The DAX hit a low that day of 9214...thus, another “random” victory for technical analysis voodoo.

So, is the trendline going to hold? Our guess is that, while it may hold temporarily, there is a strong chance the trendline is broken sooner than later. One thing we have discussed before is that the increased frequency of trendline touches is suggestive of a forthcoming break. The idea is that buyers are unable to bounce the index as high or for as long as they did before, so it is an indication of waning demand.

On the plus side, like the STOXX 600, the 38.2% Fibonacci Retracement of the 2009-2015 rally is nearby (around 9000). This level held in February and provides another layer of potential support. Unlike the STOXX 600, that February low was above the October 2014 low. Thus, the series of higher lows is still in effect, which is a positive.

That said, the dominant force on the chart is undoubtedly the post-2009 Up trendline. In the event that it is broken, those other factors may merely serve as speed bumps on the way lower. Furthermore, should that break occur, one can be assured that a falling German stock market will serve as a significant weight upon the rest of Europe, and possible the globe.

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More from Dana Lyons, JLFMI and My401kPro.

This 48ft tall statue stands atop the Coolest Building in Manhattan. It’s the clock tower sculpture on the 42nd Street entrance of Grand Central Terminal. 750,000 commuters use Grand Central every day. Almost none of them can tell you who these three characters are and what they represent.

The figures are Roman gods. For our purposes the first thing to know about the Romans is that they stole their Gods from the Greeks. Perhaps that’s why the Greeks have no compunction about stealing from everyone else to this day. Who are we to question?

From left to right that’s Hercules (Heracles in Greece), Mercury (Hermes) and Minerva (Athena). Hercules is strength, obviously. His name means power everywhere. Every train terminus should have a Hercules.

Mercury is a little Abercrombie in any millennium but everyone knows he’s fast. (Look: Wings!) He’s also a God of commerce which is germane (ahem) this morning. Athena is goddess of wisdom, craft, weaving, medicine, poetry and magic. I’m guessing she never got used to being called Minerva so I won’t do so here.

If you roll polytheist or are just looking for a hedge cc: Athena on your prayers this morning. Greece is going to need all the wisdom, poetry, drugs and magic it can get if it is to remain in the eurozone. The Greeks voted No because they were given a choice between suffering more pain now at the hands of the Germans (”Booooo!”) or continue paying about half of their taxes and stick it to those bastards who were dumb enough to keep them solvent for the last decade (and didn’t throw Greece out of the eurozone when they lied on the application).

Yesterday the Greeks voted down a new austerity program by a stunning 61%-39% margin. Most polls had it much closer. I was one of the people who was way off. What I forgot is just how easy it is to get Europeans to vote for anything if you can convince them it will tick off the Germans.

The ballot may have been baffling to outsiders but in US Greek System terms the “No” parties were where all the good drugs and hot people were. The “Yes” voters didn’t have parties. They’re the 70% of Greece lucky enough to have jobs and hoping to keep them. This was Kennedy vs Nixon with a Greek twist.**

In retrospect we should have expected this. If anything we didn’t stereotype Greece enough. They don’t pay their debts and they freaking hate Germany. They feel very strongly about both these points.

Now what?

The European Central Bank (read: Germany) can’t ignore 61-39. If this vote did anything (history will prove this an arguable assertion) it was remind the world just how much Europe hates Germany. This choice was “chaos” versus “what Merkel wants”. The Greeks chose anarchy, bread lines and chaos because Screw Germany. We were fools to bet on anything different.

If the ECB throws money at the Greeks and rewards this lunacy the Greek government will go back to the table and seek to DK its entire debt load. As in “Don’t Know” the trade… “What debt? Let us start fresh.”

PM Alexis Tsipras is playing this hand already. Last night Tsipras suggested the Greeks had voted not for leaving the eurozone but for “a Europe of solidarity and democracy”. 

In other words, a Europe where everyone agrees to acknowledge and accept that Greece has voted to stiff its creditors while demanding more money. 

Perhaps recognizing the need for a token gesture of consiliation Tsipras sacrificed one of his team. Finance Minister Yanis Varoufakis has resigned, noting it would be difficult for the ECB to be constructive in further talks if he remained in his post.

If Varoufakis does anything less suspicious than build an underground lair someplace immediately I’ll be stunned and disappointed.

The ECB doesn’t want to negotiate with Greece. What they really should do is write their Greek debt down to zero and cast Greece into the economic wilderness to forage for Hilton sisters. 

What the ECB probably will do is spend a period of time saving face then cut a deal. 61% is a rout. All unions are a matter of faith as much as anything and no where does that truth apply more than to the euro. It is a currency without a nation. It’s an idea and probably a bad idea at that. Still, it exists and might be worth at least pretending to try to save. (My friend Peter Kenny makes a nice argument for the ideology behind the euro here.”

But it exists. Unplugging Greece now would make the ECB look unspeakably evil. Greece has no currency and no more is coming in country. No one is lending them money. The nation is on the brink of freezing.

Whether or not its Greece’s own fault is irrelevant. This is optics. The Germans are too sensitive to pull the plug on Greece. That’s still the smart bet though it’s getting interesting.

Reactions: Euro up, stocks down early

Maybe we all should have seen this coming but we didn’t. Predictably the markets are rather twitchy this morning. The Dax is getting hammered, the euro is strong (?!) and the S&P 500 hit its lows on the futures while sane people were sleeping. As of this morning we’re down half a percent.

Your morning pictures, supports and a rare quote from Fibonacci himself are below. Have a nice day. May the witty and wise Athena be ever at helm of your emotional command center.*

“I know… poverty, riots blah blah… what about my stocks?” - America

DAX How the cookie crumbles…

The euro rallies early (and why you might care)

** Note that Greek shipping tycoon Aristotle Onassis was rumored to be pitching woo with Mrs. JFK even before Dallas. Eventually Onassis would marry the widowed FLOTUS. She got security, he got the ultimate trophy wife. Jackie O would later become a NY fixture. Without her it’s likely Grand Central would have gone the way of Penn Station and been demolished. 

So, indirectly the Greeks saved the building atop which we fix their stolen gods. Time is a flat circle my friends.

All kidding aside, does anything matter less than the rolling European debt crisis, now into Year Six and showing no signs of letting up? Or does anything matter more? To me, this is more a humanitarian crisis than a financial crisis at this point, more of a social story than a market one.

Is contagion still a real fear, given how long European banks and institutions have had to prepare for whatever is going to happen in the southern sovereigns?

If a Euro bank gets Suge Knighted by Greece at this point, don’t they kind of deserve it? Will there be any effects in the US beyond a revenue hit for multi-nats and whatever impact there is in the currency market?

I don’t have the answers to these questions, but they’re worth considering.

Some reading:

What on earth is the ECB up to? (Coppola Comment)

Greek finance minister calls for bridging loan – live updates (Guardian)

My thoughts on how this whole thing should eventually play out:

We last checked in on our favorite Western European female President just before Thanksgiving here. At that time the German DAX was approaching a Potential Reversal Zone (PRZ) of a bearish Shark harmonic. What has happened since? Well her mood above gives a hint.

While technically, the price action of the DAX did not get to the PRZ at 10150 it came close enough for Technical Analysis. A reversal lower on December 8th started a cascade that touched a 50% retracement of the pattern on Tuesday. If the Index wanted to reverse back higher this would be a good spot to do it. But so would the secondary target at the 61.8% retracement lower at 9021.

As for right now, the Hammer like candle Tuesday, with the real body inside the prior day, in Harami style adds weight to the potential for a reversal. So does the RSI turning back higher right at the edge of the bearish zone. Only the MACD is continuing top point lower.

And if it does continue higher now? Then there is a RSI Positive Reversal, as measured against the November 17th low. This would target a move to a new all-time high to at least 10150. Look for confirmation from a close over 9600 to give more confidence and then wish Ms. Merkel Merry Christmas.

This past week has seen some saber rattling on the geopolitical front (see Russia), but this feels much ado about nothing for the financial markets, as central bank easing news has kept stocks elevated and investors happy... Japan, then China, perhaps Europe now?

But that only scratches the surface. And note the U.S. isn't currently included in that list of "easers."

Ask yourself why easing occurs in the first place. Here's a couple reasons:  1) An attempt to spur economic growth  2) An attempt to devalue a currency to spur #1.

So if other parts of the world are struggling to find economic growth, perhaps their investors at home have been busy investing in other parts of the world (i.e. the U.S.).

But let's dig a little deeper, looking at where and why geopolitics may heat up. Because this is a near-term concern for global equities, even if it adds to the theme above.

First and foremost, Crude Oil is of major import here. At $75/barrel, Oil prices are down nearly $30 since summer. This puts pressure on economic regions that are dependent upon energy exports as a driver of there economy. Two come to mind: 1) Russia  2) The Middle East.  Coupled with sanctions, how long can this go on before something gives with Russia (and its relations with the U.S.). I'm concerned this could add pressure to the current Russia-Ukraine conflict. See a chart of Oil below:

WTI Light Crude Oil Prices (EOD)

            Charts created on stockcharts.com

This economic theme applies to the Middle East as well. If there is a global slowdown occurring, how will lower Oil prices further impact the region's individual economies? Could social unrest add fuel to an already tenuous situation.

Europe is another region that will need to spur economic growth or risk a rise in social unrest. The Euro zone economy has really sputtered and the heat is on. Are they next to announce some form of dramatic easing/stimulus? Unemployment, and especially youth unemployment, remain stubbornly high. According to Statista, the under 25 unemployment rate in Spain was 54% as of May 2014; Italy was 43% and France 22.5%. The average for the Euro Area was 23.3%. That's their future and those numbers will need to go down if Europe is to find stability.

Again, here we can see visually how money may be flowing from Europe and Russia to U.S. equities:

S&P 500 vs German DAX vs Russian ETF (RSX)

A stronger US Dollar is a mixed bag as well. While it assists in weakening currencies of economies that are struggling (positive), it's the deepest currency in the world, and its strength affects capital, from debt to equities to commodities to currencies (the results of which are uncertain).

My final concern isn't necessarily a concern of today, but it may be a concern in the world of tomorrow... if easing measures of global central banks do not begin to broadly float the global economy, it will likely lead to regional tensions, as economics is typically one of the root causes for conflict.

Thorns in the Market...

Roses for Today...

And the All Time New Highs...