Markets

The confusing rally

SImagine it is a global economic crisis and nobody is going there. The mood on the stock markets has been classified as something like this for weeks. The German Dax broke the 12,000 mark again this week. In general, the most famous German stock market barometer seems to have recovered magnificently from the corona crash. Nobody seems to be really interested in the fact that the German crème de la crème of the economy is (only) kept alive with billions in loans in the Dax, as happens at Tui or Lufthansa.

(R) a technical stock market rally

There is no other explanation for the fact that the Dax has made the jump again via the 200-day line running at 12,111 points in the middle of the week and is therefore by definition back in the current upward trend. The February all-time high of 13,795 points is still far, but not too far away for many. Is it just because of the combined flood of money on the part of the ECB and of course the 130 billion stimulus package from Berlin? Not only.

Because this rally is also driven by many technical and not fundamental factors. This originated in April in large part in the so-called short covering of futures, which investors had used instead of options, “because the hedging costs were very expensive due to the high level of implied volatility and the inverse VIX forward curve”, as Guilhem Savry , Market expert of the Swiss asset manager Unigestion explained. “In late March and early April, equity index futures on indices such as the Euro Stoxx 600 and S&P 500 skyrocketed, but open interest rates declined, confirming the short squeeze effect.”

The tech factor

Another factor in the general upswing is the seemingly infinite focus of investors on FAANG shares (Facebook, Amazon, Apple, Netflix and the Google parent alphabet). At the end of April, according to Unigestion’s analysis, they accounted for nine percent of the MSCI AC world market cap, but ten percent of the profits for the next twelve months.

Many fear the next technology bubble to come. Experts say no and refer to the terrific figures in the technology sector since 2010, according to which it held an average gross margin of 21 percent, compared to 13 percent for the S&P 500. It seems unlikely that the margins will deteriorate in this sector be.

Because this sector is far ahead of many others. While the corona crisis forced structural reforms that were long overdue in many classic industries, the tech companies took this step very early on and at the same time, as solution providers, benefit from the increasing pressure to act at other companies that have so far “missed” these essential steps.

In addition, many of the technology companies can also boast good fundamental data. Steep stock prices, underpinned by more than solid fundamentals – currently no investor can avoid the “expensive” stocks of Alphabet, Amazon, Apple, Facebook and Netflix or Microsoft and the other “Techis”.

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