Germany's DAX: FREE Insight Into Europe's Leading Economy

September 17, 2009

By Elliott Wave International

It's one of the first rules in the book of mainstream economic wisdom: a country's economy is the thermometer which "reads" its stock market's temperature. If financial conditions are heating up, stocks rise; if they are cooling down, stocks fall. Were it so simple -- millionaires wouldn't make up a measly .15% of the global population.

Obviously, there's a major flaw with this logic; namely, it isn't true. Time and again, stock prices smolder to near boiling even as economic growth chills to the bone. (The opposite also holds: Stock prices cool down even as the economy is on fire.)

Take, for instance, Germany's main stock index, the DAX 30. On August 13, Europe's number one economy reported a .3% rise in gross domestic product (GDP) -- Germany's first quarter of growth since January 2008. Soon after, the DAX began to rally and finished the day at a fresh, ten-month high.

In no time at all, every financial media outlet from Wall Street to la-la land had their story: "Germany's DAX rose nearly 1% on the GDP data. The big picture will be one of ongoing gradual recovery through 2010." (LA Times)

One problem: the DAX's bullish flame has been burning since the index landed at a two-year low on March 9, 2009. YET -- the economic data over those six months has been about as "hot" as the Arctic Circle. Here, the following news stories from the time say plenty:

* March 24, Wall Street Journal: "There's a slew of evidence that Germany is in an economic freefall: A 19% drop in industrial output, a 23% decline in exports, a 35% drop in new manufacturing orders, and on. The numbers we're seeing are just mind-boggling."

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* April 30, New York Times reveals a 17% year-over-year decline in Germany's exports and writes, "With 47% of its GDP generated by exports, Germany would suffer a severe contraction in its economy."
* May 16, Wall Street Journal: "In the fourth-quarter 2009, Germany's GDP plunged 3.5%; its worst performance in nearly four decades."
* May 17: Tens of thousands of German workers march through downtown Berlin to express their anxiety over the alarming increase in unemployment: at 7.7%.
* June 29 Associated Press: Germany's GDP has now fallen by nearly 7% in the past four quarters with widespread expectations for a 5.5% to 6% contraction by the years end.
* July 3 WSJ: "Germany's own recession is the deepest of any major economy in the world, apart from Japan."
* September 8 speech by Germany's Chancellor Angela Merkel: "We are in the worst economic crisis that the Federal Republic of Germany has experienced in 60 years."

You get the picture: During the DAX's entire six-month long winning streak, Germany's economic figures have been bleaker than bleak. The mainstream correlation was broken in its box along with any pre-emptive opportunity to position for the uptrend.

That, however, was NOT the case for EWI's European Financial Forecast. Here, the following archive of our analysis shows the extent to which objective analysis of the market's internal measures keeps traders ahead of the biggest moves:

March 2009 European Financial Forecast(release date: February 25)

"We favor the fourth-wave contracting triangle interpretation for the DAX. The DAX broke through a solid support shelf at 4014 this week so selling pressure could intensify before we see a notable rally." The end of the wave v decline should come near 3440.

March 6 European Short Term Update (ESTU):

"The DAX situation is similar to the entire region. We believe that the market is closing in on a low; perhaps it's a week away from finding a decent bottom."
On March 9, the index did indeed "find" its bottom at 3588.

March 13 ESTU:

"We must entertain the possibility that the low earlier this week may hold for a time, weeks or months, and the risk-reward equation is not as heavily favorable for the bears."

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Robert Prechter, Chartered Market Technician, is the world's foremost expert on and proponent of the deflationary scenario. Prechter is the founder and CEO of Elliott Wave International, author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.