The economic slowdown affects the indices in September
Many of us will have heard the famous phrase "sell in May and go away" in relation to the financial markets. This phrase refers to the theory that, during the period between the months of November and April, the growth in the stock market is higher than the average growth of the months between May and November. Therefore, the phrase recommends closing our positions and waiting for the summer period to pass before resuming our activity.
So far, in 2021, this premise is not being entirely fulfilled. Whilst it is true that the upward trend seems to have slowed down, if we look at the main stock market indices from June onwards, we can see that – with the exception of the IBEX35, generally speaking - the trend has remained positive, thus continuing the trend from the first half of the year.
European indices:
- IBEX35 has lost 2.37% since May.
- DAX40 is up 1.58% since May.
- CAC40 is up 3.57% since May.
- FTSE100 is up 0.67% since May.
US indices:
- DJI30 is up 0.78% since May
- SP500 is up 5.98% since May
- Nasdaq up is 9.4% since May
As we have noted in recent analyses, during the last few weeks we have observed a deterioration in the global economy. As a consequence of this, September has been generally negative, erasing part of the gains obtained up to August - with declines in September of 1.04%, 1.39% and 1.49% in the DAX40, NQ100 and SP500 respectively.
To this slowdown in macro data, we must add the uncertainty regarding the impact of the start of tapering in the United States and the formation of the new government in Germany following yesterday's elections, in which the replacement for Chancellor Angela Merkel was to be decided after she announced her departure several months ago, having led the country for the last 16 years.
These elections have resulted in uncertainty with regard to the new government, as Olaf Sholz's social democratic party (SPD) has not achieved a clear majority. Therefore, an intense period of negotiations is now underway to achieve power.
After the last meeting of the Federal Reserve, it seems that tapering will begin in November and could end in mid-2022, so we will have to be very attentive to how the market digests this situation, as a hasty withdrawal of stimulus could cause corrections in the main stock market indices.
DAX40 Analysis
If we focus on the German DAX40, we can see that, over the last few months, it has maintained a clear upward trend that led it to set new all-time highs in mid-August. These highs came after the price overcame the sideways movement it had been following since last June after successive support on its uptrend line. Although, after finally setting its current all-time highs (green band), the price began a consolidation that led it to break its important long-term uptrend line.
This break led the price to look for its important support zone in the area where its 200-session moving average in red meets the lower red band near 15,000 points. Here, the price found a point of support to make a new impulse, which has led it to once again overcome its important support/resistance level (represented by the orange band) on which it has been pivoting for several months.
This support/resistance level is crucial for the DAX40, because, if it is able to hold this level, we could witness a new impulse in search of its historical highs. In contrast, if the price loses this level, it should face again its main support and the subsequent loss of this level would open the doors to a change of trend and an even bigger correction.
Evolution of the last five years:
- 2020: 3.6%
- 2019: 25.48%
- 2018: -18.26%
- 2017: 12.51%
- 2016: 6.87%
SP500 Analysis
If we focus on the daily chart of the SP500, we can see that - after the declines of this month, due to the slowdown in the economy caused by the energy crisis and the delta variant of the coronavirus - the price has lost the important bullish channel which it had been following after forming a double bottom between September and October last year represented by the red band.
This break of the lower band of the channel is important because, if the price fails to recover these levels and the pullback is confirmed, the SP500 could suffer a major correction, the main target of which would be the width of this important channel around the orange band which acts as the main support/resistance level.
The loss of this level would jeopardise the current bullish structure and open the door to a possible change of trend from bullish to bearish. Although to confirm this change in trend, the price would first have to face its important 200-session moving average in red.
Evolution of the last five years:
- 2020: 15.05%
- 2019: 29.09%
- 2018: -5.96%
- 2017: 19.08%
- 2016: 8.80%
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