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German Stocks Poised to Experience a Robust Rally

David Becker
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www.iforex.com
German Stocks Poised to Experience a Robust Rally

The ECB finally pulled the trigger on Thursday and low and behold the market rallied. The Euro tumbled to fresh 12-year lows and is poised to test the 2003 lows at 2.0760. German stocks soared and are likely to continue to generate gains. As a guide, US stocks have climbed nearly 45% since the FOMC began its open ended sovereign bond purchase program in September of 2012.
The ECB on Thursday announced a sovereign bond purchase program, which will run alongside the current asset backed program and covered bond purchase program. The central bank is anticipating overall purchases of around EUR 60 billion per months through to the end of 2016, which puts the total at over EUR 1 trillion.

Purchases will be made according to the ECB’s capital key in the secondary market, a concession to the prohibition of monetary financing as laid down in the treaty. This means that the lion share of purchases of around a quarter will have to focus on German bonds, rather than debt of the crisis countries at which the program clearly is aimed, even if Draghi stressed that the aim is to lift inflation expectations and ultimately overall inflation back to around the 2% mark.

With this in mind, the stock market that is likely to outperform is the German market. But investors will need to take positions in this market that are void of Euro exposure. Investors in the US can purchase the WisdomTree Germany hedged equity ETF. This ETF attempts to mimic the returns of the German equity market, but removes the exposure to the Euro by selling Euros.

The ETF is poised to test the 52-week highs which coincide with the December highs. Momentum has turned positive as the MACD (moving average convergence divergence) index generated a buy signal. This occurs as the spread (the 12-day moving average minus the 26-day moving average) crosses above the 9-day moving average of the spread. The index moved from negative to positive territory confirming the buy signal.

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