In our work we happen to analyze both the fundamental data of the markets and to carry out the so-called technical analysis, which disregards balance sheet valuations, context and macroeconomic cycle considerations, and is based solely on the historic price series. At the base of technical analysis is the theory that prices incorporate everything, both known information and also information unknown to most and the result of insider trading.
It must be said that technical analysis is anything but an exact choice, it is a probabilistic analysis which, when certain long or short-term price configurations occur, helps us determine the event that has the most high probability of occurring.
Already last week we had a look at the DAX, the total return index of the top 30 German stocks. The DAX gave us some long-term technical signals this week that are worth looking into. If we draw a trendline that joins the weekly closing prices since mid-2011, we observe first of all that for the first time the weekly closing occurred below the trendline, albeit slightly, and furthermore this violation occurs with a red candle, i.e. which closes on Friday at a lower level than the Monday opening level.
When this pattern occurs, the most probable trend is a rebound towards the trendline or even a little above (for example towards the psychologically important 10.000 level), to then fall back below Thursday's lows. This movement is also justified by the downward trend of the index, with decreasing relative highs and lows since April. This is the statistically most probable trend, but it is far from certain. The biggest reason for frustration with using technical analysis is that the error rate is high.
In a case like this, based on historical data, the chances that things go as planned are of the order of 65/70%. The other possibilities are that the index finds from here the starting point for a recovery of an uptrend (unlikely case, 5 – 10%) or that the index finds the strength to go back up to around 11.000/11.500 and then returns to test the trendline (probability 25 – 30%). Even if the error rate is high, systematic use involves making many decisions with a probability greater than 50% of correctness, and this is beneficial in the long run.
The objection. Some might argue that this trendline piercing situation is due in particular to the case blowout Volkswagen, and that it would not have happened without that news. But this is precisely the strength of technical analysis, that of limiting itself to taking note of the movement of prices without making any guesses.
No doubt the VW deal has weakened the German stock, and the technical analysis highlights that this weakness has come at a critical moment. The criticality of the DAX is part of the context of rather weak world stock exchanges. For example, let's look at the American S& P500 and the Italian FTSEMIB.
The strong transfer in August brought theUS index well below the levels at the beginning of the year, the distance from the moving averages suggests a possible temporary recovery in the 2000 area in a non-positive picture. We also report the graph and the data of the US Margin Debt already included in the September macroeconomic report, to which we also add the August reading which was recently disclosed and which was still missing from the September report.
Il Margin Debt it is the amount of money Americans borrow to invest. When this indicator reverses it is usually bad for the stock. This happened both in July and in August.
THEItalian index it is still positive compared to the beginning of the year, the only western exchange with France, but the technical picture with an imminent bearish moving average crossing is not positive at all.
The consequences. In the light of this less than positive picture, a further weakening of the DAX that the technical analysis indicates as probable would bring down almost all the other exchanges. Consequentially we refrain from taking new equity positions and for some portfolios we consider selling part of the equity reducing its weight.
For the portfolio component invested in certified, these have their own risk/return logic, they must be valued at maturity and therefore the positions do not change. The high yield bonds they have a good correlation with the equity, but they have the big advantage of paying a high coupon and of decreasing their volatility over time as maturities approach.
For this reason they can be kept in the portfolio and subsequently gradually increased, even waiting a few more weeks. There diversification is a must and a cool head as well, as volatility is constantly increasing and declining liquidity. EUR government bonds have maintained good value and stable yields thanks to Draghi's ongoing QE.
