Weak momentum in German stocks suggests further downside

Key points:

• A short-term gauge of price momentum shows a sharp contraction in blue-chip German stocks
• The 10-day rate of change for the DAX Index declined by more than 12%
• Similar momentum signals preceded unfavorable returns on a medium-term basis

What happens when short-term price momentum accelerates to the downside

Let's conduct a study to assess the German blue-chip stock index when the 10-day rate of change declines by more than 12.5%. I will use a reset above zero on the rate of change to screen out duplicates.

Similar episodes of negative momentum show weak returns for the DAX

This signal has triggered 19 other times over the past 60 years. After the others, the DAX Index shows weak returns and unfavorable win rates in the 2 to 8-week time frames. The last 11 signals have delivered negative returns at some point in the first 2 months in all instances. After other sharp contractions in momentum, the 1-week win rate provides a small glimmer of hope for a mean reversion bounce.

What the research tells us...

When the 10-day rate of change for the DAX Index shows a negative shift in price momentum, the adverse price action begets more adverse price action. Similar signals to what we're seeing now have preceded weak returns and unfavorable win rates in the 2 to 8-week time frames.