Market Sentiment: “Pessimistic with a delay”

22 May 2024. FRANKFURT (Goldberg & Goldberg). After all, the DAX managed to produce a new all-time high just a few hours after our last sentiment survey, before trading calmed down noticeably on the following days. Prices have retreated little by little since then, but the stock market barometer only fell by 1.4% at its peak, and the subsequent slight recovery resulted in a small loss of 0.5% on the week. The vast majority of recently neutral institutional investors – a record 45% of all respondents – were therefore right to assume that the DAX’s upward trend, which started at the beginning of May, would take a break, but that there would be no major countermovement. It is quite possible that this relative calm was due to the Whitsun holidays (although the stock exchanges in Germany were open on Whit Monday), but possibly also due to a lack of macroeconomic impetus. 

Despite the comparatively quiet market activity, there was a significant drop in sentiment among institutional investors with a medium-term trading horizon. Our Börse Frankfurt Sentiment Index fell by 20 points to a level of -21. The group of bears has gained 16 percentage points – 75% of the new pessimists are attributable to previously neutral players, while the remaining quarter is attributable to former bulls who have turned their position 180°. 

Change of mood in two steps
However, in order to understand the motivation for this clear change in sentiment, it is necessary to go back two weeks. Overall, the proportion of neutral investors is now back at the level of 14 days ago, while there has been a significant shift of 17% of all respondents from bulls to bears in the same period. In other words: in many cases, former optimists merely closed out their earlier bullish commitments and only then, in a second step, decided to take a pessimistic position. Last week’s new all-time high, which was not significantly higher than the previous week, probably facilitated the decision to hedge further or take short positions.

Virtually unmoved
Meanwhile, there was little change among private investors. There, the Börse Frankfurt Sentiment Index fell by 2 points to a new level of +5, at the expense of the polarization between bulls and bears – albeit asymmetrically distributed: While the optimist group fell by 4 percentage points, there was half as large a decline among the pessimists of 2 percentage points. The discrepancy between the investors surveyed via social media and the other investors is also striking. The former are still much more optimistic. 

With today’s survey, the sentiment gap between private and institutional investors has widened considerably. On the one hand, the bearish stance adopted by institutional investors over a two-week period with a delay is remarkable, as if they wanted to wait for confirmation as to whether it really makes sense to go short. On the other hand, interestingly enough, the DAX has hardly suffered at all on balance from the underlying declines – an indication of good long-term demand. A relative analysis over three and six months, however, shows that the recent pessimism is significantly lower than the absolute figures suggest. We are also assuming that the latest bearish exposures will be covered again in the event of further setbacks (probably noticeable for the first time between 18,250 and 18,300 points). All in all, from a sentiment perspective, this is not bad news for the DAX.