DOW and DAX update

dow 19 dec 2012dax dec 19 2012

So, so far no banana, but as we pointed out earlier, this market will do anything to push the stocks up. This time it is Japan promising more stimulus , Greece  buying back debt at 31 cents on the dollar, Germany having its confidence factor that reached a 2 1/2 year low suddenly charging the other way and the fiscal cliff fatiguing everybody.

The Dow is hitting the lower line and perhaps had not yet completed the a-b-c as the c lacked the 5th wave. The Dax similarly is right up there completing its C wave. Stay tuned.

DAX, Frankfurt’s total return index update

dax dec 11 b 2012Dax dec 11 s 2012

Both charts are the same except that the one on the left is a 5-year chart and the one on the right a 1-year chart. Just to remind the reader, the Dax is a total return index that is not directly comparable to other indices that are compiled on a simple price bases. A few days ago I mentioned that the Dax had made a new high since the lows of the “Great Recession”, this was incorrect and we still have about 20 points to do that.

Clearly, in the big picture, the Dax has traced out an A-B-C rebound and has accomplished very little over the past 9 months. The A-B-C follows the pretty standard 5-3-5 structure in which the C is an exceptionally well formed diagonal (wedge) with the proper 3-wave subdivisions and the usual overlap between waves 4 and 2. Overlap can only occur in this kind of wedge and ergo it follows that it must be one!

The (possible) message to take from this is that like the DOW, the TSX, the FTSE the Dax also sports an overall pattern that screams GET OUT NOW.  The wedge that starts in Sept of 2010 at about 5000 (not shown due to limited choices with Bloomberg charts), has the nasty characteristic that it normally retraces back to the base making 5000 an initial target. However, as A-B-Cs are invariable corrective structures, a drop below the March, 2009 lows should be anticipated.

To put this in perspective we have added the STOXX50. The highest point on this chart (not the index itself) is at about 4600 and the present value is at 2600, consequently this index of the top 50 blue-chip companies from 12 different countries in Europe,  is still down by 41%

stoxx50 dec 11 2012

Also shown is the STOXX600, then (June) and now charts;

STOXX 600 june 20012stoxx600 dec 11 2012

The call was wrong as it did not anticipate the long drawn effects of QEs etc. The damage is minimal in the overall scheme of things.

Germany, the DAX and EWG, total return–, price weighted–or capital weighted Indices.

ewg dec 2012DAX dec 2012

At a glance the DAX, on the right, has substantially outperformed the EWG, MSCI Germany ETF. Most stocks in that ETF are also in the DAX so why the difference? Simple put one is an apple and the other an orange. The DAX at about 7500 is 500 points or 6.25 % below the two previous peaks, the most recent one in early 2007, almost 6 years ago.   The EWG, at about $24 is roughly $12 or 34% below the high at the end of 2006, about 5 years ago. The difference is an eye-catching 28% but Germany is Germany and Siemens is Siemens. The difference is that the DAX index is a total return index and therefore includes all dividends earned and compounds them, which at 3% dividend adds up to an additional return of about 20% over 6 years. The S&P is also a total return index, as is the Russell and a few others. The DOW has its own peculiarities in that it is price-weighted.

For indices that contain mostly non dividend paying stocks the difference should be negligible, but this is not true if there are big stock by-backs. The moral of the story, compare apples with apples and know your fruits. By the way, the TSX is not a total return index!