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DAX Hits All-time High; RSI is Overbought

David Becker
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DAX Hits All-time High; RSI is Overbought

The likelihood of additional stimulus by the ECB has pushed equity bourses higher allowing the German DAX to hit an all-time high at the end of last week. German stocks sold off Thursday after the ECB delayed further monetary easing until the first quarter. Later reports that more monetary stimulus might come as early as January helped boost European stocks which rallied sharply on Friday.

The German DAX Composite Index jumped 2.4% on Friday to reach a new record. Other Eurozone stock markets jumped as well. France rose 2.2%, Spain gained 2.6%, and Italy 3.4%. Friday’s strong jobs report in the U.S. may have also improved market sentiment in global markets. Oil importers like China and Japan hit three and seven year highs respectively. That puts most global stock markets on a sounder footing.

European stocks are buoyed by increased liquidity and a weaker currency. The euro has moved lower as yields continue to favor the greenback. The 10-Year Treasury yield was significantly higher than the German 10-year yield. U.S. yields are not only much higher than Germany’s, but that the spread between them is widening. The spread between them has risen significantly since late 2011 and is now at the widest point in several years. Currencies with higher yields like the U.S. usually perform better than those with lower yields like Germany. That trend should become even stronger with expectations that U.S. rates will start to move higher in 2016, while ECB monetary easing should keep German rates relatively flat.

The DAX pushed through resistance hitting an all-time high. Momentum remains positive with the MACD (moving average convergence divergence index) printing in positive territory with an upward sloping trajectory. The only caveat is that the RSI (relative strength index) which is a momentum oscillator that measures overbought and oversold levels, is printing a reading of 71, which is above the overbought trigger level of 70 and could foreshadow a correction.

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