DAX riding high
A rising tide - such as we are clearly experiencing - will naturally tend to lift most boats. Equity markets around the world are highly correlated, and have become ever more so over recent years. Despite the strength of these inter-relationships, that does not mean they do the same thing all of the time. While they may move in the same direction, the degree to which they do so can differ markedly.
Germany 30 England 8
To see this in action, compare the performance of the DAX with the FTSE over the last year. The German index has galloped ahead some 30 per cent since its lows of the final week of 2011, whereas our own large-cap leader-board is ahead only by around 8 per cent. Clearly, it is not good enough merely to be correctly bullish on equities as a whole. We ideally also need to pick one of the stronger indices.
Sooner or later, I expect the FTSE to play catch-up with the DAX. The index has made almost no net progress since its highs of mid-April 2010. One interpretation of this - and quite a popular one among certain readers of this column, going by my inbox this week - is that the index is now topping. I prefer the view that it is consolidating in triangular fashion, pending a major breakout to the upside.
FTSE triangle
The moment of truth may be close at hand. The FTSE has rallied just above the top of its triangle pattern. I am not a huge fan of patterns in technical analysis. I find them to be too subjective. The message here seems simple enough, though. If the index can indeed break higher, it could rally by several hundred points. The height of the triangle suggests a move of more than 1000 points. But let’s not get too carried away. I have a more realistic near-term objective at 6256.
I happen to regard the DAX's leadership ahead of the FTSE as bullish for stocks in both countries. The German index is a more cyclical beast than our own one, and I would expect it to do better at times of risk-taking by investors. I apply the same principle when it comes to the Nasdaq 100 index. Technology also tends to lead the way higher during risk-on phases.
Notably, this has not been the case lately, however. The Dow has outperformed the Nasdaq 100 since 4 December. The last time that the Dow led the way higher like this was in advance of the indices' October-November swoon. Should I not be worried right now, therefore?
Dow leads last autumn
For my money, the more accurate comparison is what happened in the markets late last year. The Dow was ahead of the Nasdaq for much of the period between late September up to the end of December. The tech index then came powerfully back to life, outstripping the Dow as both indices rallied into early April. Sooner or later, I expect the Nasdaq to be heading the bullish pack once more this time round too. But I'm happy focusing on the Dow for now.
