A Review Of The German DAX
Hello, traders. Welcome to The Stock Trading course and the second module, Stock Market Indexes.
Today we’re going to talk about the German DAX. We’re going to start by defining what the DAX is. The DAX is a stock index consisting of the 30 major German companies in the Frankfurt Stock Exchange. So this is basically the German equivalent of the Dow Jones Industrial Average in the United States.
The DAX has two versions called performance index and price index. This depends on whether dividends from the companies are counted for each pricing. The most commonly used method, or version, of the DAX is the price index. So basically, the DAX is a price-weighted index.
Now, let’s break down the DAX. The prices used to calculate this index, come through the electronic exchange system called Xetra. A free flow methodology is used to calculate the index weightings along with a measure of average trading volume.
Let’s define what a free flowing methodology is. The index is calculated by taking the stock price and multiplying it by the number of shares available in the market, instead of using all of the outstanding shares of the company. So basically, instead of calculating the market cap of the company with all of the outstanding shares, we only use the shares available for trade with the DAX. This method excludes all locked shares by promoters and governments.
Like the Dow Jones Industrial Average, a change in the DAX represents a change in investors’ expectations of the earnings and risk associated with blue chip companies in Germany.
Let’s go through the chart of the DAX. And let’s have a look how it has performed over the years. Here is a daily chart of the DAX. As you can see, we hit the all-time high on the DAX at 12,400 in April 2015. And then we have been on a down move, that I might not call a correction. Because, this is not just a move to the down side but we are making lower-highs and lower-lows. Which means that we are in an immediate bear market on the DAX.
Let’s see how much the DAX has fallen on this short-term bear market. As you can see from the all-time highs at 12,400, the DAX has dropped 24.67%. I’m going to zoom in a little bit so we can see the overall sentiment of the DAX.
Now we have data from July 2010 until today. As you can see, the DAX has been in a very strong bull market for about four years. If you calculate the move from the low in 2011, until the high in 2015, you can see that the DAX gained 150% in this timeframe.
Basically, we were in a very strong bull market like we have not seen in another index. Right now, we have dropped to this very strong levels of support, so we are still in a bull market. And if you grab a simple trend, line 2, you can see that the bull structure has not been broken yet.
This is very important for investors in German stocks. Because, even though the DAX has dropped from the all-time high until the touch of this trend line, for about 25%, we are still in a very strong bull market, with just a very steep correction in the overall sentiment of the index.
If we only take this part of the chart, well, most analysts are going to say that we are in a very strong bear market. But you have to look at the overall sentiment of the index before you acknowledge this statement.