Key Talking Points:
- Inflation expectations diminish as investors expect the Fed to act sooner than later
- Economic recovery matures and offers fewer opportunities for growth in equities
The Fed’s sooner than expected hawkish message from last week continues to weigh on equities as inflation concerns diminish on the back of expectations that the Fed will act before things get out of hand, pulling the plug on flexible financing that makes stocks so attractive.
Friday’s session ended with the biggest daily pullback in the DAX 30 since January this year as a quadruple witching event took place, dropping below a key support level to finish the week just above 15,400. The Asian session this morning has seen renewed weakness with the German index pulling back further, but buyers have been able to halt the bearish pressure at 15,280, at which point the DAX has reversed and is now 0.2% above where it started on Sunday night.
Friday’s pullback was intensified by a large number of option expiries taking place, but it may be that this forms the basis for a longer-term trend change after months of upside momentum. It’s not uncommon that investor’s time their trades with large option expiries so it allows for new trends to emerge.
Looking ahead, investors are likely to keep an eye out for commentary from Fed members in the coming days as the dust settles from last week’s meeting. Fundamentally, equities continue to have a good amount of support on improving economic expectations, but considering that we may be heading into the mature stage of an economic recovery the opportunity for growth starts to diminish, which would keep equities at lower valuations, meaning that there could still be further pullbacks before we see a period of stabilization and consolidation.
DAX 30 Levels
Technically, the DAX 30 is starting to show some weakness. Last Friday saw the German index break below two key trendlines, one on the Daily chart since the beginning of May, and one on the weekly chart since the end of October 2020. The DAX had been pretty consistent at finding support on the weekly trendline up until last month, when it slipped slightly below on two occasions, leading up to Friday’s corrective pullback. The stochastic oscillator has only just crossed below the 80 line that marks overbought conditions, so there is plenty of room for further retracement in the coming weeks.
The long-term bullish trend remains relevant as long as the DAX 30 stays above 14,815, whilst a drop below this area could intensify the bearish pressure towards 14,000.
DAX 30 Weekly chart
| Change in | Longs | Shorts | OI |
| Daily | -23% | -2% | -9% |
| Weekly | 6% | -17% | -11% |
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--- Written by Daniela Sabin Hathorn, Market Analyst
Follow Daniela on Twitter @HathornSabin
