07/06/2019 - Markets: FMM-Strategie


Potential for value

It is still too early for a comeback of value stocks but the underperformance of these stocks has never been greater than currently. If leading indicators turn positive value stocks have some potential. We are at gunpoint.

DJE's team of analysts monitors and evaluates the markets on an ongoing basis using the company's own FMM method according to fundamental, monetary and market-related criteria. They summarise their results once a month.

From the DJE Kapital AG team of analysts

May is a very weak month for the stock market. The "Sell in May" rule last worked in 2012 but since then May has been a very good month every year. All in all, however, it is a high level of moaning as many indices continue to achieve double-digit gains despite some very poor leading indicators. A very simple statistic: a weak May was often succeeded by a good June. Well, this simple saying explains most of it because after the indices tested the 200-day line they are likely to recover within the next few weeks. Market indicators give sufficient green light for this.

All in all we maintain our recommendation for investment ratios and recommend a neutral orientation. The fundamentals are still too poor for an increase in the investment ratio and the market signals are too good for a decrease. For the time being we remain faithful to the good performing sectors with Momentum but are keeping a close eye on the value sector and are standing at gunpoint.

With brief exceptions (2013 and 2016) value stocks have consistently outperformed the market over the past 10 years. If the still very weak leading indicators turn potential for value will be there as the underperformance has never been greater. Presently it is still very early for a forecast or too early to position oneself more strongly because there are no visible triggers currently.

The biggest triggers for the market remain a settlement in the trade dispute and stronger stimulation in China. When the time comes you have to react to both. Stimulation in China would probably have an even greater effect. The probability of this happening is increased by negative economic data from China and is therefore not too great a burden.


  • The bond markets are already expecting a recession. We are aware of these trends. Some sectors of the equity market prices are already facing a full-blown recession. Much has already been priced in.
  • The inverse yield curve should not worry us too much if it takes place at such a low level. In addition this signal has always had a long delay in the past.
  • First of all, the next reporting season is very important. We do not expect much from the quarterly results which is why for the time being we are only assuming a market-related counter-movement.
  • There are two very large divergences: The purchasing managers' indices for manufacturing (contracting) and services (expanding) are diverging and cyclical stocks are performing worse than stable quality stocks. The latter are also likely to run for the time being; anything else would be unusual at this time in the cycle. If, however, there are sustained signals that the economy is improving the very high valuation is likely to be the downfall of quality stocks. "The trend is your friend" will apply until then.
  • The transmission belt from the manufacturing industry to the (proportionately larger) service sector is the labour market. Here you will find the first signs of grinding as we learn from individual companies or as it is also visible in the ifo detail components.
  • According to recent reports from China in the automotive sector may have bottomed out in July. It looks as if the government is taking measures to provide loans for the automotive sector. At the same time inventories have improved. Should the measures succeed the disastrous recent sales figures could be the low point. This would also help the German original equipment manufacturers. On the other hand car manufacturers have so far also assumed that China will not deteriorate any further.
  • The leading indicators continue to turn downwards in almost all regions but with a bit of good will see an improvement in China is visible. China is usually ahead of the other countries. A twist in the leading indicators is a prerequisite for ensuring that the market recovery we are forecasting will not remain a flash in the pan.
  • In particular the data from the real estate market in China deliver grounds for optimism. Unlike 2015 house prices continue to rise across a broad front.
  • Freight rates are at best stabilising but the data from China are not dramatically bad either. The same applies to the Li Keqiang index.
  • Certainly a solution would help the markets. Expectations are no longer as high as they were a month ago. A minimum consensus is certainly possible but the situation seems to have hardened too much for the big move. China certainly has a longer breath and can sit out the problem longer than US President Trump who is working towards his re-election. In the short term Trump is likely to be in the longer term and the economic impact in China is greater than in the US as the price reactions show. But China's staying power should not be underestimated.
  • Trump will certainly not keep his hands off tariffs on European cars either but in contrast to the rivalry with China he probably does not see any threat to the supremacy of the US in Europe. Europe is standing in its own way and from today's point of view is not a competitor; after all important key industries are missing.
  • There may be some inflationary pressure from services but overall rates should remain moderate and the 2% mark should not be in danger. Falling oil prices are likely to take pressure off, and no excessive inflationary pressure has yet been seen from wages either (keyword immigration).
  • Positive earnings revisions are often an important prerequisite for rising stock markets. We are currently seeing a turn in the USA.
  • A negative factor in the US could be the relatively high inventories.


  • Many market participants are already expecting another interest rate cuts. We don't see that at the moment.
  • As long as the US Federal Reserve (Fed) does not ease its monetary policy it will presumably only remain with technical market counter-movements. Even if the Fed eases it will still take some time for the measures to take effect. This was also the case in 2007/08.
  • The M1 money supply was a good indicator in the US in 2008 but so far there has been no improvement.
  • M1 growth in the euro zone is very good at 7% on average over the past 30 years and country by country.
  • Lending is stable at a moderate level.

  • Sentiments for the euro are constructive. There could well be a revival. A weak dollar would be good for gold and could also attract money to Europe.
  • So far Europe has seen steady returns. After all Europe vs. the USA is no longer developing much worse.
  • In recent days the major technology stocks were weaker than the overall market which is a good signal for the breadth of the market.
  • Put/call ratio delivers 2.1 buy signal*
  • Volatility is okay with 1.0, but no clear buy-signal yet (only at approx. 0.8 about 75% hit rate).
  • The number of stocks on our recommendation list is relatively small and the number of prices reached on our watch list is quite high. This has often been a good constellation in the past.
  • Citiywire reported yesterday that there are asset managers who have now reduced their equity exposure to 0%. Perhaps also a contrarian signal**.
  • Nasdaq RSI*** is in oversold territory.

*The relationship between call and put options.

**A signal running against the trend.

**The Nasdaq Relative Strength Index indicates whether the market is oversold or overbought.

Note: All information published is for your information only and does not constitute investment advice or other recommendation. Long-term experience and awards do not guarantee investment success. Securities are subject to market-related price fluctuations which may not be compensated for by the active management of the asset manager or investment advisor. This information cannot replace a personal consultation. All information has been provided with care and to the best of our knowledge at the time of preparation. Despite all due care the data may have changed in the meantime. Further information on opportunities and risks can be found on the website www.dje.de. The sales prospectus and further information are available free of charge in German from DJE Investment S.A. or at www.dje.de The fund management company is DJE Investment S.A. DJE Kapital AG is the distribution Agent.