DAX 40 hits new all-time high: the 20,000 mark beckons
Germany's benchmark index has reached unprecedented levels despite deteriorating business sentiment and growing recession risks.
DAX 40 hits record high despite weak data
The DAX 40 defied weak economic data by reaching a fresh all-time high on the first day of December at 19,929.08, despite the ifo business climate index declining for a fifth consecutive month and German services purchasing managers' index (PMI) slipping into contractionary territory, suggesting economic weakness is spreading beyond manufacturing.
These figures align with government forecasts predicting a 0.2% gross domestic product (GDP) contraction for 2024, positioning Germany as a laggard among major economies. The divergence between economic data and stock market performance appears striking, but the deeply pessimistic sentiment and significant underperformance of European markets are beginning to attract contrarian investors looking for potential value opportunities.
Bank of America strategists have responded by upgrading European equities to a tactical overweight, suggesting much of the region's economic deterioration is now priced in.
The Stoxx 600 has continued to lag behind the S&P 500 in November, making 2024 one of the worst years on record for relative performance. While European equities have been weighed down by French political instability and accelerating fund outflows, historical data shows December has delivered positive returns roughly 70% of the time over the past quarter-century.
Stoxx 600 average monthly returns over past 25 years
This could provide some hope for European markets as we head into the final month of the year, though traders should remain mindful of ongoing economic and political headwinds facing the region, especially in France where the French prime minister Michel Barnier has forced a budget bill through parliament in a move expected to tigger a vote of no confidence.
DAX 40 technical analysis
The DAX 40's push to new all-time highs comes despite deteriorating fundamentals, suggesting strong momentum remains in place with the index rising by 4% from last Wednesday’s low. Today's new peak extends the index's 18% year-to-date gains, though overbought conditions on momentum indicators may warrant caution, especially on the weekly chart.
DAX 40 weekly chart
The DAX 40’s advance is much greater than the Stoxx 600’s 7% gain, on par of that of the Dow Jones but still significantly below that of the S&P 500 and Nasdaq 100.
DAX 40 year-to-date comparison chart
With the May to December resistance line at 19,987 and the psychological 20,000 mark providing technical resistance, it is possible that the last few day’s sharp rally in the German blue-chip index might soon take a breather, though.
DAX 40 daily chart
Near-term support lies at the previous October all-time high at 19,674.68, followed by the late October high at 19,643.12. While the next lower September to early November highs at 19,563.97 to 19,546.90 underpin, upside momentum should be maintained.
A daily chart close above Monday’s 19,929.08 record high would reinforce the bullish technical picture, with a rise above the 20,000 mark targeting the 161.8% Fibonacci extension of the September 2022 to July 2023 advance, projected upwards from the October 2023 low at 22,165.56.
Recession risks versus market optimism
Despite the German stock market’s rally to new record highs, the likelihood of a technical recession by late 2024 in Germany remains high, which would mark Germany's second since the Covid-19 pandemic. Political uncertainty ahead of February's snap elections may delay crucial policy decisions and dampen the demand for German shares. Furthermore, weak industrial orders and subdued consumption present significant challenges for Europe's largest economy.
Yet the German stock market continues to climb the proverbial wall of worry.
How to trade the DAX 40
- Research German economic indicators and market trends
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This apparent disconnect between economic fundamentals and market performance highlights the importance of considering both technical and fundamental factors when trading indices.
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