Sunday, January 1, 2012

DAX And The Entire European Financial Index - Going Parabolic?

Recently I've tuned my focus to Europe in order to try to get a better handle on exactly what the hell is going on over there.  Well actually, whatever is actually going on over there will probably forever remain a mystery to all of us... hidden under so much paperwork, lies and spin that we'd never be able to get to the bottom of it.  Nonetheless, I want to know if there are any clues we can garner from across the pond if we just focus a little harder and do some meaningful analysis?  Yes, I think there are.

So here's a revealing study I've been investigating over just the past few days.  First of all, rightly or wrongly I think Germany holds the key to clues coming out of Europe.  Therefore, I want to know what the DAX would reveal if it were compared to the entire European banking system.  And what do you know... it reveals plenty.

We begin by putting together a chart of the DAX as if it were priced in units of the Dow Jones Europe Financials Index.  This would be similar to pricing the S&P 500 in terms of the BKX.  The only difference is that the study which follows is purely European.  The first picture we're going to look at is the monthly chart of the $DAX:$E1FIN (the DAX divided by the Dow Jones European Financial Index).  We have to look at the big picture first in order to see if there is in fact any pattern or relationship that suggests reason to investigate further.  And immediately, we see that there is.  The result is a ratio which in turn can be compared directly to activity within the DAX itself.  I've also added the European Financials Index as a separate entity in its own panel in order that we can look at all 3 at the same time and in the same context.  I realize it's a rather long lanky chart, but it contains a ton of information and there's not much point in presenting a chart that lacks useful data:

MONTHLY - Click here for a full blown version

The first thing we want to know is whether or not any major top or bottom in European equities (using the DAX as the most logical proxy for all) coincides with a major change in the ratio.  In other words,
was there any sort of major shift in the ratio at the time that the DAX made a sudden change in trend?  If so, which of the components contributed the lion's share to that shift?  We also want to know what happened within the European financial sector at the time of that abrupt change.  In the pursuit of studies like this, occasionally it becomes apparent that there doesn't seem to be any such relationship occurring at all.  Indeed, there have been times when I have put together a study similar to this with the expectations that some sort of meaningful correlation would pop right off the chart, only to find that there in fact was none.  I can occasionally be surprised by such a revelation but hey... if I'm on the wrong track, I recognize that in a hurry, dump it and move on to the next one.  But of course, when we're talking about the German stock market and the entire European financial district in the same sentence, surely there has to be a meaningful relationship that can lead to clues?  And of course... there is.

Looking at the monthly chart above, what I was particularly stricken by is the incredible range the ratio covered between 2005 and 2011.  In those 6 short years, the ratio has tripled (exploding from a reading of 15 all the way to 45).  Another way to word that phenomenon is like this:  Between the years 2005 and 2011, the DAX had risen 3 times as much as the European equities had in percentage terms (the DAX had risen 300% of what the financial sector did over the past 6 years).  But in August, September and October of this past year, the ratio suddenly turned lower seeming to have surely put in a top... only to suddenly reverse and surge higher yet again.  This is a stunningly bad development because not only did the ratio turn back higher in September, but it began to rise at the steepest rate of acceleration ever.  This fact carries seriously dangerous connotations.  Something is going to have to give in a big way.   Either the current trend in the ratio, which for the past 7 years has been ever-accelerating with no sign of slowing down, is going to literally go parabolic, or it is going to reach some sort of limit and go into reverse.  We'll discuss the connotations a bit further down, but for now, in order to try to determine which it is going to be, we drill down a little closer and look at the situation as seen on the weekly chart below:

WEEKLY Click  here for a live and updated weekly version.  Click here for a live daily version.

The most remarkable aspect that immediately jumps off this chart is the persistence in the acceleration of the upward trend in this ratio.  It is revealing beyond the shadow of a doubt that the weakness within the entire European financial sector continues unabated, in fact accelerating, in spite of weeks and weeks and months of dawdling and rumors and can kicking and lies and spin by the orc-controlled media propaganda machine.  In a nutshell... charts don't lie.  The European financial system is under-performing the equities markets in such a way, that if it isn't reversed, will simply bring down the entire complex.  Equities cannot continue to climb with banks collapsing.  There's no magic to this.  No prediction necessary.  It's just a fact that every thinking person would agree with.  It's logic that the bankers have absolutely no power to refute.

So now that we can see that there is a horrible situation in existence in Europe that is apparently worsening by the week, we can only look at the charts and admit that we don't know with any degree of certainty whether or not some sort of miracle cure will be produced in the weeks or months ahead.  All we can say with certainty is that as of this moment... no, the cure is not in place and it certainly doesn't appear to be anywhere on the horizon either.

So what are the implications?

First and foremost, we know that as long as the ratio is not only rising but accelerating, the European financial district is weakening further and further and faster and faster relative to the equities markets.  There is a limit to how far it can weaken before banks actually start collapsing.  If and when the first one falls, the entire financial sector would be on the verge of collapse.  The ratio would likely go parabolic as some members within the financials community finally literally collapse.  At some point the whole charade would be exposed, equities markets would finally exhibit the effects that are long overdue as well, and the stock markets would hit the skids.  From that point forward, the only thing that could possibly save the equities markets would be some sort of miracle that caused the financial sector (the entire European financial sector) to be given new life and to begin to strengthen at a faster rate than equities.  I don't see how that day could possibly arrive until some point likely years from now..  The time has arrived for a real cleansing and I don't think there's any way of avoiding that now.

I don't think a cure exists.  I don't think the dark masters can conjure one up at this point.  After all, what they're fighting here is at least 3 decades of credit creation and insanely wild spending sprees.  The US military's black ops budget alone for example, is reported to be in the trillions.  Who knows how much money that represents?  But whatever it is, it has been borrowed and American citizens are paying the tab for it.  And so will their grandchildren be paying for it aeons from now.  The same type of irresponsible borrowing and spending like drunken sailors has gone on in Europe for decades as well.  And it's all come home to roost.  The piper is demanding his payment and he will not be denied.  Nope, although I don't profess to know with any degree of certainty, it's my belief that the only way the piper is going to be repaid is for the entire expansionary mantra of the past three decades to be unwound.  Doesn't that just make sense?  If your credit card has reached its limit and your income just fell, you're not going to get out of trouble by having the brain-dead banker offer to expand your credit limit.  It just doesn't work that way.  Not for you, not for me, not for a small manufacturer, not for a huge corporation, not for a municipality, not for a sovereign government and not for the FED nor the ECB.  Unfortunately, a deflationary collapse seems to be the only logical event that could provide any permanent fix.  Painful as hell, but the only real fix there is.  Somebody is going to go broke.

And finally, I provide one more reason why I believe the deflationary route is probably the path the economic world is going to take, I present one chart from an article that will be published on Jan. 3rd.  It's from a re-visit to the study on the S&P 500 as it appears relative to commodities only related stocks.  As you can see in the chart below, over the course of the past 13 years, the ratio of $CRX:$SPX also displayed the same sort of unmistakable and stunning series of ever-accelerating trend lines.  Until just a few months ago that is.  In this case, the ever-steepening trend lines are suddenly being penetrated to the downside.  Don't expect to see that happen in the $DAX:Eurofinancials chart.  Although it's not yet conclusive, and in my view won't be until the 13 year trend line is decisively breached, the implications of the recent happenings in the chart below are clear... the great unwind appears to already be in progress.

From the article on the CRX which will be published right here and on GEI on Jan. 3rd.  Click here for a larger version.

I only wish I knew the answers with certainty folks, but I don't.  I don't know anybody who does.  All we can do is to analyze various situations and relationships and draw the best conclusions we can.  All we can do as technicians is to put the odds in our favor as best we can.  And right now, the evidence is all pointing in the same direction.  Deflation seems to be in the cards and unless the banking monsters of the world can come up with something heretofore unthought of in order to delay the inevitable for a few more years, deflation it will be.  At the moment, they are not winning that battle.

As is the case with most studies that I do of this nature, I won't be dropping this ball any time soon.  I'll be monitoring the developments as seen in the charts above as we move forward with expectations that it will continue to provide very useful evidence as events unfold.  If anything really outstanding develops you'll find a follow-up right here at some point in the future.  Until then, I wish each and every one of you the very best for the coming year and hope 2012 is the best year of your lives so far.  I don't see why it can't be, because since you've read this far, you and I both know that at least you're looking at all possibilities.  That's a whole lot more than what 99% of investors do.  Thanks for reading and all the best going forward.


  1. Excellent analysis A.R. YOU last chart is really telling. Where will you post it? Plz let me know.

  2. Thanks katzo7. Man, it sure didn't take long for people to find this article and start reading it. I just published it last night but didn't release it for viewing until this morning. A dozen people are reading it right now but you might have been the first, lol.

    I assume you're referring to the bottom chart? If so, it will be published right here tomorrow in a new article. The only reason I'm holding off on that one is out of respect for John Lounsbury. He's been such a staunch supporter and promoter of my style of analysis (I'll never know why but sure appreciate it) that I promised him he would publish it even before I do, lol.

    The reason for that is that he published the original article on his site... before this little blog of my own had even been conceived of. The original article (published last May) is the one at the top of this list. The chart you referred to is showing the aftermath... the follow-up. So as I mentioned, if you're interested in that one, it will be published here tomorrow at the same time it's published on GEI.

    Thanks for taking the time to read this piece bud. It's rewarding to know that there 'are' a few people out there who find my 'stuff' at least interesting enough to read.

  3. AR- Here's one from south of the border who appreciates your work as well. European markets up this morning on what, I don't know. Hopium exports up? All the best and Happy New Year to you and yours.

  4. Great article AR. I don't know what's in store for us this year, but I'm glad you're analyzing the charts. One technical question about your chart: for the StochRSI indicator, is the signal a crossover of the MA's?

  5. Hi Billiam. Nice of you to take the time to read this little assessment of the goings on I Europe. Yeah, the orcs in Europe are having a hell of a lot of fun today, goosing her up before the American markets open. No doubt it's on very low volume in Germany and France, a great opportunity to do some illusion painting. Oh hell man, I don't know for sure. I suppose it's possible that the markets head higher until the next crisis... a day from now, a week from now... who knows? But it's nothing more than kicking the can a bit further down the dead end road. It can't last much longer because the deflationary forces that seem to be building are so much larger than any amount of money printing that the criminals want to try to put forth. They're not fooling anybody but themselves in my opinion.

    I was actually expecting a gap lower for the US markets on Tuesday. It's pretty hard to hold that vision though when the DAX and CAC are being goosed like this. Nonetheless, the western markets are sure looking burned out right now. But we'll see tomorrow I guess. There's certainly nothing saying that the first week of January has to be an up week although they certainly do try to make that happen. You know, get the world off to a glorious start. Here's how it looked back at the start of 2009 and this is actually what I'm thinking will happen this year. But you know how it works... now that I've said that, the market will be juiced up to 1635 before the week is over, lol
    Jan., 2009

  6. Great post A.R. looking forward to your next tomorrow.

  7. Thanks greenface. Yes, that's what the StochRSI indicator is showing. Special note of thanks to Scottick who taught me that one. As far as I'm concerned he owns the rights to it... it's a hell of a great tool. Scotty's a hell of a team player and you can't help but love a guy like that. I'm going to toot my own horn and declare that I'm one too. But damn it all, I simply refuse to share some of my better stuff any longer on sites where there are ignorant, spineless punks whose only goal in life is to fail and to urinate on other people. They wouldn't get away with that in person I assure you. That's why we have hospitals in Canada. I imagine it's only a matter of time before Scottick gets fed up with it all as well. He's a great guy and I 'know' he doesn't have a lot of spare time or energy to waste like that.

    But back to topic... I liked the StochRSI anyway and have it monitoring the situation on most charts and on most time frames. But just like any other indicator, it often gave a signal just a bit too early. What Scottick did was to remove most of that noise and force the indicator to "prove it". So we make the StockRSI itself invisible but add two moving averages of it. That's what you're looking at... the moving averages. Excellent call dude, lol.

    Thanks for dropping in buddy. You were one of the very first people to decide to follow this little blog and I won't forget that. Thank you.

    Best of luck in 2012.

  8. Thanks Anonymous. I'm not sure if you're my buddy Jack or a different 'anonymous' but in any case... thanks. Yes, that follow-up to the CRX piece is scheduled for tomorrow... not sure what time because I've given the luxury of that decision to John Lounsbury. It may seem a bit silly, but it's my way of paying honor and thanks to him for his staunch (and very surprising) support of my work. I don't know for sure what it is that he sees, but I 'do' know that he's fully aware about how ratios analysis works. He can read one of those charts and 'get it' immediately. Besides, it was he who willingly published some of my other stuff when few had even heard of me, including the original CRX piece. He's a great guy too. So is Michael Eckert of EW Trends and Charts who also supported my work in the beginning. But something went wrong with that relationship although I still think of Mike as a good friend. In fact I've been trying to add his blog to my blog list but Blogger just won't accept it. Well it accepts it but it comes up as a dead link. That's no good. But I'd sure support EW Trends and Charts if I could make that link work over in the blog roll. Here's what his site looks like:
    EW Trends and Charts

    Most people I deal with are really great folks. Funny how that happens sometimes, eh? all the best in 2012 :-)

  9. "Equities cannot continue to climb with banks collapsing!" Oh so true. Nitram

  10. Yo Nitro, lol

    Ain't that the truth? I mean, WTH is the world thinking? That the major banks of the world are healthy? That's exactly why I did this study... to point that out. They're continuing to be sold off in spite of all the funding they've been getting. How much more convincing does the world need? Not all of them can survive and when the first one topples...

    Thanks for dropping in. You know you're welcome here at any time. All the best in the new year :-)

  11. Excellent work AR, thanks! And the 3rd will be my birthday ... looking forward to that gift! It's already looking very interesting ... the chart you posted does look like the down trend has started.

    I'm going to read this one again, it's a very insightful study. Interestingly, the ratio looks like it could have another spike or wave upward like it did in 2008. Haven't had the panic thrust yet. Also interesting that the ratio is at the same level as the peak of the crisis (part one of the crisis). Also noticed that the European Financial Index is closer to the 2009 lows than is the XLF ... leading us down.

    Thanks a heap ... ratio analysis is new to me, but it looks very insightful.

  12. Thanks Greggor. If you think of a ratio analysis such as this as if it were a currency trade (which you're familiar with) then it becomes so easy to understand a chart like this. Just as in the case of currencies (let's say $AUD:$JPY for example) you know that if the currency on the left side of the ratio rises, that would add pressure for the ratio to rise. So in this case, if the DAX rises, the pressure is on the ratio to rise.

    Those are just the very basics, but it helps to understand what it takes for the ratio to rise or fall... just as in a currency trade. It can also happen (as I realize you know) that the factor on the left side of the ratio can rise but the ratio falls. That can only happen if the factor on the right side of the ratio is also rising AND at a faster rate than the one on the left. I'm sure you realize all this, but I'm also sure that many other readers don't. So I hope that description helps a bit. Once a person understands what it takes to make a ratio rise and what it takes for it to fall, then it's all downhill from there. Ratios are "the most revealing" type of analysis I can think of, which is why I investigate them so much. Of course they have to have some sort of connection in order to make them meaningful.

    One time I did a ratio study between the price of cold beer and gasoline. Much to my dismay I discovered that I'd be a whole lot better off if I started drinking gasoline and running my car on beer. So after a week of trying that all that ever happened was that I kept finding myself sitting in my car for hours trying to get it to start and all the while barfing out the window. I finally gave up on that whole project when I lit a cigarette. So some ratios are helpful, some are explosive, lol.

    Nice to see you as always buddy.

  13. Forgot to wish you a happy birthday buddy. Here's a link to an awesome video that a lady from San Diego that I know only vaguely just sent me. It's very nice and very new to YouTube. Thanks Andrea. I pass it on as requested by the producer:
    Short video

    Happy B'Day Greg :-)

  14. AR, a promise is a promise. TrendXplorer is public, although the site is still a work in progress:

    Thanks for your writings.

    Best of trading in 2012 !

  15. Lol... great to see you again TX. We sure haven't spent much time together... just that one day I think. But thanks for remembering that some of us wanted to stay in touch with you.

    "...although the site is still a work in progress."

    I hear ya. Same here since my own blog has just turned 3. Weeks, lol.

    For sure it's a bit of a learning curve but I'm positive you'll progress with it as fast as I have fortunately been able to do. It was a bit daunting at first but now it has just progressed to learning the more detailed intricacies. At least I have a spot where I can make a few comments without having to put up with 'disturbers'. Great job... and thanks again for stopping in. And you're more than welcome about the posts I put up.

    I've just added you to the blog roll and if you get one set up, perhaps you'd consider doing the same. You're one guy I'm more than happy to be hooked up with.

    I wish you the best of success in 2012 as well. Don't be a stranger.

  16. And in a way, all stock prices (for that matter, all *prices*) are ratios of a kind.

  17. You betcha Mitch! Dollars per gallon is a ratio. Gallons per barrel is a ratio. Miles per hour is a ratio.

    And the price of DAX shares per unit of E1FIN is a ratio.

    It's just that some of the most interesting and informative ratios are seldom even thought of, let alone investigated. They're very revealing in so many cases. As the old saying goes, "everything is relative". It's a far more important concept than most people give it credit for. In fact, a meaningful ratio is more revealing by far, than the chart of either of it's components.

  18. Hey AR, thanks for sharing that video ... very enjoyable and inspirational. Very timely with the new year and b-day. Thanks!

  19. Timely study and conclusions, Alberta.

    5 January 2012 Last updated at 18:50 ET

    Euro drops to 16-month low over bank concerns

    French bank stocks closed lower, with Societe Generale down 5.4% and BNP Paribas down 5.3%.

    Germany's Deutsche Bank fell almost 6%, with Commerzbank down 4.5%.

    Spain's Santander dropped 4.5%. Italy's UniCredit fell 17% before its shares were suspended for the second day in a row.

    Luis de Guindos, Spain's economy minister, told the Financial Times that its banks may face up to 50bn euros ($64.2bn, £41.3bn) in new bad loans - higher than previous public estimates by the government.

  20. That's what I'm talkin' about. lol

    Nice link Brightfire, thanks. Finally the media is directly addressing the very topic I'm demonstrating in this article.

  21. What do you suggest as a way to post here without using identifiable accounts like Google (people already know by Google screen name) or not just posting as Anonymous?

  22. What I'm trying to say is, if there is a good way to get an ID for use on your blog, I would join the discussion here. It doesn't work to well for me to point without any identity. I would like to have an identity as far as your blog is concerned. However, I wouldn't want my screen name from elsewhere to be automatically used. Let's say my Google screen name is Snow Bunny. If I post here using that ID, it would be indexed by search engines and anyone who knows me by Snow Bunny will be able to find out that I'm researching investment matters, which I don't want known.

  23. I understand your question Anonymous, and I do appreciate why you might want a separate identification for this site (or any other where you'd want to do that). Right now you're posting as an anonymous person because I have that setting selected. I have the option to disallow anonymous comments which would force people to either become a registered user or to use a Google ID. In this case, I don't even know what "registered user" means, since I haven't demanded any kind of registration. I don't even know how to do that.

    But I have no interest in 'forcing' people to do anything. So I think your only alternative is to create a new account with Google which would probably entail using a different email address to complete that registration. Other than that, I don't have an answer. My apologies, but I've actually never had to think about this before.