Germany's DAX Reclaims Bull Territory: Will the Comeback Story Continue?

Put this in your pipe and smoke it -- the market's trend is not being driven by "fundamentals." So, what is driving it?

by Nico Isaac
Updated: December 15, 2022

In late October, German Chancellor Olaf Scholz fired up the buzzometer by announcing that his country would become one of the first European nations to legalize cannabis for recreational purposes.

Well, from the looks of Germany's benchmark DAX index, the country's stock market is already getting high as a kite. From its September 28 low to December 13, the DAX soared the requisite 20% to meet the qualifications of a new bull market.

The trippy thing about the DAX's gains is that they've occurred alongside a bearish "fundamental" backdrop of aggressive monetary policies in the U.S., soaring energy prices, a trade conflict in the UK and Europe, and so on.

On November 14, Yahoo Finance noticed the discrepancy between Germany's stock market and the many economic strikes against it:

"[The bull run is] despite ever-clearer evidence that the German economy is sliding into recession, with business profit margins hurt and consumer confidence battered by the sharp rise in energy costs this year."

Strange as it may seem, this isn't the first time the DAX has defied its "fundamental" script. If we rewind the tape, we see a similar news-price uncoupling in late 2021. At that time, the DAX was orbiting record highs, and according to the mainstream pundits, Germany's stock market was primed to continue its record-breaking up streak.

On November 11 of last year, Goldman Sachs by way of MarketWatch set the tone for "the bull market for 'still cheap' European stocks to carry on in 2022.'" The article cited a battery of reasons "to expect better earnings growth from Europe" led by Germany's DAX index, including:

• Higher commodity prices
• Modestly higher bond yields that will boost bank returns and more infrastructure spending
• An increase in Europe's share of more stable and higher-growth companies

On December 1, 2021, Reuters joined the bullish chorus:

"Uncertainty about the COVID-19 pandemic has not dented prospects for European stocks to hit record highs in 2022, boosted by a recovery in corporate profits, according to a Reuters poll of 23 fund managers, strategists and brokers."

And on December 2, 2021, Bloomberg parroted:

"Even lockdowns and omicron can't derail strategists' optimism that the European stock market rally can extend into next year."

Yet, despite the seeming green lights for further gains, the DAX was a major bullish buzz kill. Prices peaked on November 18 of last year and spent the lion's share of 2022 in grizzly territory.

So, bullish news but bearish market action -- and the reverse of that today: bearish news but bullish price action. Huh?

Now here's a sobering thought: What if all this time, "fundamentals" are not the main driver of stock market trends?

In fact, they aren't. Investor psychology, which unfolds as Elliott wave patterns directly on price charts, is.

In turn, we go back to our November 2021 European Financial Forecast. There, we showed this chart of the DAX index, which identified a five-wave rally of multiple degrees as complete at the November 18 peak.

One month later, in the December 2021 European Financial Forecast, we presented a side-by-side comparison of the DAX today versus a tested barometer of consumer confidence the GfK -- and -- the DAX vs. the GfK at its 2007 peak.

The parallels were undeniable, as EFF stated:

"Market history never repeats exactly but today's relationship between stock prices and consumer confidence is similar. After plateauing in 2018 and 2019, consumer confidence crashed alongside stocks in February 2020, during the initial outbreak of COVID-19. The GfK indicator then rallied to a secondary but lower peak in November 2021, which appears to be coinciding with the end of wave V in the DAX.

"The bottom line is that today's potential stock market peak is rhyming well with the confirmed stock market peak that took place in 2007. If the relationship continues, the DAX has several...thousand points to lose."

Several thousand points indeed. From its November 18, 2021 peak of 16290, the DAX plunged 4000-plus points to a low of 11885 on September 28 of this year.

As for the bull market comeback since -- our October European Financial Forecast showed this chart of the DAX. It presented an alternate near-term bullish labeling for waves A and B of a still-unfolding wave (2) rally with still more upside to go.

The November 2022 European Financial Forecast confirmed the end of wave B and start of wave C "back in the vicinity of the wave A high."

As for whether the DAX will maintain its high, our December European Financial Forecast again puts the index under the Elliott wave lens. We identify the exact price level we're "watching like a hawk." If this price level is obeyed, the DAX's next signficant move could make the difference of "thousands of points."

Are you ready to take your financial independence to the next level?

If so, our European Financial Forecast is the ultimate place to start.