Eat, Sleep, Trade, Repeat.... Downside for DAX ?

Readers of my last note on Europe, “Storm clouds brewing for Germany”, might recall the slight build-up of pessimism around the political and economic landscape in Germany and the potentially weaker outlook for the equity market.

?We noted the contrast between the country's record-high DAX equity index and its sluggish economic growth, suggesting that 2025 might not bode well for the German stock market. ?Since that note went out, the ECB cut rates for the third time this year and the DAX, comprising of Germany's top 40 companies by market capitalization, went on to set yet another record high.? Will this positive price action continue?

Amid a backdrop of poor economic data, a worsening political landscape, and shorter odds being offered on a second Trump administration, there are clear signs that this rally may run out of steam.? Adding to these woes, the IMF recently cut Germany's growth forecast to 0% and Deutsche Bank, whilst reporting a record third-quarter profit, announced that provisions for bad loans would rise to €1.8bn this year, from €1.5bn in 2023. All is not well in the fourth-largest economy.

?It’s not all bleak, though. If you read the Lex column in the FT last week, you would have seen that Germany is on sale. The article points out that DAX is trading at a 40% discount to the S&P 500 (on a price/earnings basis) and that German companies have become relatively small and relatively cheap. The intimation here being that corporate Germany remains attractive to global punters “on the lookout for a bargain.” This echoes a comment we made in our previous note, that from a trading perspective, there could be key opportunities in focusing on individual stocks and hedging market risk with DAX futures.

?There's a palpable sense of uncertainty, or in my case, incredulity.?Age old questions being asked.?Why are we here? ?Where do we go from here? ?Fortunately, we have a tool for that. The Strangle.? A long call, long put options strategy that provides investors anticipating a move in the price of the index, but unsure of its direction, the opportunity of benefiting from a large price movement whilst fixing their downside to the premium paid for putting on the trade.

?JP Morgan touted this very trade last week when they recommended buying November 2024 Strangles on Dax. They are back again this week, pushing the three-legged, long put spread funded by selling calls trade.? A low-cost structure that, in their own words, capitalizes on steep skew and elevated volatility.?It was a firm favourite of the derivs desk back in my own days at the mighty Morgan. Particularly when you could “block it up”, receiving bro on six legs of options. ?It was a commonly requested strategy popular with some of the sovereign wealth / real money set.

?The genesis of the trade? A view that DAX will underperform relative to the S&P 500 and Eurostoxx 50 if Donald Trump wins the US election given its cyclical, export-oriented composition and large exposure to China.? Hopefully, Mr Trump takes heed of German Finance Minister Christian Lindner’s comments recently that it doesn’t matter who enters the White House — “together we are stronger.”

?

Technically speaking, the Dax future has broken below a two-and-a-half-month trend line & is just holding the 100 period moving average on the 4 hour chart around 19450.

In my TechTalk conversation with DayTradeIdeas Jason Sen this morning, he points out that a break below 19350 today should be a sell signal targeting 19275 & a buying opportunity at 19200/19100 where there is a good chance of a low for the day.

He suggests that Bulls need prices to recover above 19600 to remain in control, targeting 19700/710 & of course the all-time high at 19770/802.

?Trade DAX Index Futures around the clock on EUREX.? Available in regular, mini and micro formats from the Asia open.?? Options on DAX are available from the European open.

?Happy Trading!

?

Disclaimer: Any opinions, news, research, analyses, prices, or other information provided is to be considered general market commentary and does not constitute investment advice. Opinions expressed represent my own and not those of any current or previous employer and are for information purposes only.