German stocks had a strong performance in February but there are signs that the rally is running out of steam. The DAX index, which tracks 40 of the biggest companies in Germany, has consolidated between €15,640 and €15,200 in the past few days.
German and other European stocks jumped at the start of the year as inflows from foreign investors rose. This happened as Germany and Europe in general dodged a recession bullet, helped by the relatively elevated temperatures.
At the same time, there was an overall view that German stocks were and still are undervalued. Indeed, the DAX index has price-to-earnings (PE) ratio of about 12. In contrast, the S&P 500 index has a PE multiple of ~18. This means that it has become relatively easy for investors to find bargains.
Meanwhile, several companies published strong quarterly results. For example, Deutsche Bank, the once-embattled bank, published strong financial results as its profit before tax rose by 65% to €5.6 billion and net revenue jumped by 7%. Net profit more than doubled to over €5.7 billion as interest rates surged.
The DAX index was also driven by Commerzbank, the second-biggest bank in Germany that moved back into the index. Its stock has surged by over 26% in 2023, meaning that it has outperformed Deutsche Bank.
Bayer share price has also soared by over 21% as activist investors put more pressure on the company. They believe that the company has more room to boost its financial performance and profitability. Other companies that have propelled the DAX index higher in 2023 are Fresenius, Heidelbergcement, Continental, and Daimler.
Still, the DAX and other global indices face significant challenges ahead. The most significant issue is the rising interest rates and bond yields. As I wrote in this article, the 2-year bond yield in the US is yielding 4.7%. And in Germany, the 10-year is yielding 2.57% while the 2-year is yielding 3%. Therefore, we could see some more inflows into the bond market.
Turning to the daily chart, we see that the DAX index has been in a strong bullish trend in the past few months. It peaked at €15,660 in February, which was a notable level since it was above the 78.6% retracement level. The stock remains above all moving averages and the key support level at €14,935, the highest point on March 30th.
Therefore, the index will likely have a pullback in March as investors rotate to the bond market. A move above the key resistance level at €15,659 will invalidate the bearish view.
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