DAX is Unequivocally in a Major Bear Market
The chart below plots the DAX against off its Apr-15 high vs. the paths it took off its two other most recent and major structural highs, those being the Mar-00 and Oct-07 peaks that led to 65% and 55% bear markets, respectively.
To all but this chap, the analog above should make it triumphantly clear – Europe, via the DAX, is unequivocally in a major bear market, despite massive balance sheet expansion from the ECB!
However, look at a ratio chart of MSCI Europe ex Germany vs. DAX. The ratio appears as if it has some chance to break out of a persistently descending wedge pattern b/t lines (1) and (2); at the same time, there has been a significant bullish divergence in the ratio’s RSI in recent years. Could the DAX begin to under-perform the rest of the continent?
But why would Europe ex Germany ever out-perform Germany itself? The latter has the strongest economic foundation and even before the Euro was introduced in 1999, the ratio below was on the decline. Is it therefore a fairly dubious assumption to believe anything like this could ever happen?
The only scenario I could envision producing such an outcome is tremendous Euro strength which would disproportionately hurt Germany vs. the rest of the continent.
On that score, here’s the same plot of MSCI Europe ex Germany vs. DAX from above and with a EUR overlay as well. Since 2007’s global equity, debt and RE peak, as the blue plot of the EUR has weakened over time, and such weakness has been highly persistent, MSCI Europe ex Germany has drastically under-performed the DAX, completely in-line what you’d expect Germany’s export-based economy.
Thus, for this arrangement to reverse course, one would need significant and persistent EUR strength.
Why would that drive Europe ex-German out-performance vs. the DAX? Because the non-German economies of the EU are import/consumption-driven economies. For instance, here’s a plot of Greece’s current account balance % of GDP (pink, inverted) alongside the ratio b/t the Athens Stock Exchange (ASE) vs. SPX and EUR since the mid 2000s. Note that as the EUR weakened over this period Greece’s current account deficit collapsed and become much less negative – a weaker Euro greatly impaired its ability to over-consume vs. its production – and the ratio of the ASE vs. SPX collapsed.
Thus, to reiterate, ASE out-performance must be driven by EUR strength which will allow Greece’s current account deficit to expand again.
In my mind, the only likely catalyst for such an event would be GREXIT. But when?
The other question is, if the DAX/Europe is in a bear, given the chart below whereby the ratio of the STOXX600 vs. SPX is close to reaching critical long-term channel support, thus implying the potential for the continent to begin out-performing the US soon, what does it imply for future SPX performance?
Also consider the following chart of Europe’s VIX vs. the US’s VIX. We are printing near all-time highs. Something must give soon in the US. But if the US is about to under-perform Europe, it will likely be driven by USD strength, which implies EUR weakness. If one gets EUR weakness, the idea that MSCI Europe ex Germany out-performs DAX is a non-starter, as is a likely GREXIT.