Ralph Orlowski/Bloomberg

The DAX's Spectacular Rally Is Sending a Technical Warning Sign

  • DAX is posting biggest monthly gain among developed markets
  • Potential for next few weeks is ``limited,'' UniCredit says

The 12 percent surge this month that made German stocks post the best comeback from the global rout is spurring speculation the rally may be close to an end.

The relative strength index, a measure of market momentum, rose above 70 for the first time since March, a sign the jump in the benchmark DAX Index may have been too quick to hold. While prospects of more European Central Bank stimulus helped German stocks -- among those battered the most in the last two months -- recover faster than any other in the region, UniCredit Bank AG’s Christian Stocker says a ceiling is near.

“The potential for the next few weeks is definitely limited,” said Stocker, a strategist at UniCredit in Munich. “With the comments of Mr. Draghi, we have moved towards fair value a little bit earlier. In the short run we are overbought, that’s for sure.”

At 70, the DAX’s RSI indicates what technical analysts call an overbought level. In March, it reached such levels right before its biggest monthly slump in almost a year.

The DAX’s October advance was led by utility companies and carmakers, after a 12 percent plunge last quarter, when concern grew that China’s slowdown would hurt exporters. The only two DAX companies that have reported earnings so far this season -- Daimler AG and SAP SE -- beat profit expectations and have surged more than 20 percent in October.

The German index slipped 0.1 percent at 10:36 a.m. in Frankfurt today.

Despite the RSI level, some see further gains. In a report yesterday, JPMorgan Chase & Co.’s Mislav Matejka recommended buying European equities, saying Germany, along with Italy, “could perform the best in the continent.” And positive earnings will be among triggers for stock gains, says Guillermo Hernandez Sampere, head of trading at MPPM EK.

“I don’t see further fundamental risk to German markets for the time being,” Sampere said from Eppstein, Germany. His firm manages about 150 million euros ($166 million). “A few weeks ago, we saw the world’s end coming due to China’s slowdown and the Volkswagen scandal. Both events, markets have digested quite well. Now, investors who are not fully invested might fear to miss the possible upside.”

The DAX’s price-to-earnings ratio has rebounded, but its valuation of 14 times estimated profits is still lower than the 15.9 achieved back in April, before declines started. The DAX fell as much as 24 percent from its record through a low last month.

While the German index has more rally in it, it will level off, says Ralf Zimmermann, a strategist at Bankhaus Lampe in Dusseldorf. He sees a gain of as much as 6.5 percent to 11,500 before closing the year at 10,800. Limiting that advance, he says, will be weak economic growth, stocks becoming more expensive and uncertainty about Federal Reserve policy.

“Looking at the very big picture, I don’t see this as the start of a bull market,” he said. “If the rally were to continue another 5 percent, I would get more cautious.”

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