Be Very Scared About the Move Lower in German Stocks

• Posted by Greg Harmon
• on September 7th, 2011

I know what you are thinking. Why do I care about Germany or Europe at all. Maybe some economist can make a link somehow with the trade between the countries and currency strength to show some long term deterioration in purchasing power, or whatever, but for better or worse, I get paid in US dollars, and spend them in the USA. If I travel to Europe (maybe) or Germany (not likely) I will deal with the consequences then. But the German Stock Market Index, the DAX Composite, has been highly correlated to the S&P 500 since the last global banking crisis brought the markets to their knees. The ratio chart below of the DAX Composite against the S&P 500 SPDR, $SPY, shows this clearly. It has been in a tight range between 51 and 59 for 4 years outside of the volatile

times at the end of 2008. It also shows that since the end of August it has fallen out of this channel and is rocketing lower. Since you have not been paying attention I will let you know that this might have something to do with the DAX falling 30% since August compared to only roughly 20% for the $SPY. Remember that for a minute. Why has the DAX, the stock market composite for the very strong German economy, fallen 30% so quickly? Some will say that they are expected to bail out pretty much all of Europe (maybe not the French) and that will cost a boatload. Maybe that is part of their plan for World Economic domination as I outlined here in August. But what ever the case it means we are screwed! Why? This chart can also be interpreted as a relative flow of funds from the German Stock Market into the US Stock Market. Now time for some memory recall. Remember that part about the $SPY falling 20% during this timeframe. Well that started for many reasons

but one important one is that the US economy is in the toilet. And the chart above suggests that it is just a pause before it heads lower with the RSI and MACD supporting more downside. Now the tie in. Take a deep breath. If money is flowing from the German market into the $SPY because the German’s may have a large unquantifiable bill, even though the US economy sucks wind, then eventually when that bill is defined and presented, and the US economy is still in the dumper, this move should reverse. It fits with the charts and it fits with the global economy. Oh and what if Germany bails on the rest of Europe? Same direction move for the ratio chart back to the range and possibly above it given the trajectory before the last crisis. By the way, that is worse. Have a great day!

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