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Interesting blog on Dax and the upcoming September changes.

By Chris Weston (ex IG)

 

 
Dear Trader,
 


The GER30 - trading the biggest shakeup to the DAX since 1988
 

 
The German DAX (GE30 on MT4/5) has for long periods been seen as one of the great instruments for index traders, often getting the lion’s share of any of the European and global indices from retail traders. 

However, in recent times we’ve seen the 10-day realised volatility fall to 5% and the lowest levels since May 2019, while 30-day volatility (now 7.11%) resides at the lowest reading since 2017. These measures of index volatility and movement also show that volatility in the German DAX is indeed lower than any other major equity index.

In a world where traders are looking for movement, as well as compelling expected returns, the DAX has become relatively sanguine and equity index trader capital have flocked towards the US500, US30 and into Asia, notably the HK50. Although, volatility in these markets is considered far from lively.

(DAX 30 daily chart)
c1a00e8e-ca9b-4046-bfee-dae89517f8f3.png

We can look forward, where options pricing shows implied measures of volatility not far off multi-year lows – however, one questions if this volatility is priced incorrectly and with some big event risk on the horizon, it’s not hard to envisage a world where this dynamic changes, volatility rises and the GER30 becomes one of the most traded equity indices in our universe of index products by retail traders. 

Catalysts to make the GER30 fire up again

The list of volatility catalysts are building, and whether the traders flow is aimed at longs, or shorts is yet to be seen, but we see a highlight symbolic election on 26 September that could get protracted and messy. The ECB is moving closer to a world where they slow the pace of asset purchases (under its PEPP program). Perhaps most importantly there are major changes in the composition of the DAX that may change both the volatility in the index, but also the attraction of the index and the underlying constituents for foreign investors. 

The main change is that 10 new companies will be entering the index on 20 September  effectively making it the DAX 40. Along with other measures, these additions constitute the biggest change in the equity index since its inception in 1988. Incoming corporates include Airbus, Siemens Healthineers, Porsche, Puma, Zalando, Symrise, Sartorius, Hellofresh, Brenntag and Qiagen. 

Airbus is the biggest inclusion with a market cap of E89.9b, with Siemens Healthineers the next, with a market cap of E66B. 

By way of index composition – adding 10 new stocks reduces the concentration risk we see from having 30 stocks and by increasing the market cap by over E350b, the added diversification, in theory, lowers the variance. However, the additions challenge the way investors look at the German DAX – consider that 40% of the index constituents pay an expected dividend yield of over 3% and that can be influential on the broader index as the DAX is quoted as a total return index – that is, the price you trade reflects both the move in the price of the underlying stocks but also the dividend returns. 

By diluting the weighing of some of the higher dividend-paying stocks and increasing the weighting towards growth we may see the index command a higher P/E multiple, and have a higher beta to other markets, with increased volatility. It may even make international investors look twice at the index and re-establish the German DAX as a front-of-mind instrument for traders once again. 

The GER30 as a play on global growth

We can see the index will maintain a strong weight towards international cyclical stocks with a skew towards chemicals, industrials, and technology. Over 75% of GER30 (soon the be GER40) corporates derive sales from outside of Germany, and one could argue the new additions increase the global international exposure, notably towards Europe and China. 

After the inclusion, the GER30 index becomes even more sensitive to world traders than the S&P500, FTSE100 and other major EU bourses and holds the highest beta of equity returns to world trade – this means if we do see global growth being called into question on a more sustained basis, which I’d argue is playing out now, the DAX may well underperform and attract greater short-selling interest.

It all suggests a livelier environment in the months ahead, and with our reduced spreads on the GER30 and industry-leading top of book liquidity, put the GER30 on the radar for increased movement – because movement results in opportunity for traders.

GER30 Strategy sessions

One strategy I’ve been looking at on the DAX is a short-term mean reversion model – I have optimised the settings to give the best results – and while over fitting is an issue the sample size is solid. Here, I wanted to buy DAX futures (what our GER30 is priced off) when the 2-day RSI is < 10 AND the index was above its medium-term moving average (the system suggests 81 days is best). I wanted price to rebound into the 9-day EMA as a profit target.

fb639052-7679-4c8d-ba32-c07233f51e65.png

The results are since 2000 I would have placed 122 trades, with a 78%-win ratio. The average win/loss are balanced, so the returns are strong and beat a buy and hold strategy before costs. The settings can be changed on shorts, where a 10-day EMA seems to work bests as a profit target.

Past performance obviously doesn’t guarantee future results and automated strategies incorporate many assumptions.
  • Like 2
Link to comment
On 06/09/2021 at 14:32, Caseynotes said:

Interesting blog on Dax and the upcoming September changes.

By Chris Weston (ex IG)

 

 
Dear Trader,
 


The GER30 - trading the biggest shakeup to the DAX since 1988
 

 
The German DAX (GE30 on MT4/5) has for long periods been seen as one of the great instruments for index traders, often getting the lion’s share of any of the European and global indices from retail traders. 

However, in recent times we’ve seen the 10-day realised volatility fall to 5% and the lowest levels since May 2019, while 30-day volatility (now 7.11%) resides at the lowest reading since 2017. These measures of index volatility and movement also show that volatility in the German DAX is indeed lower than any other major equity index.

In a world where traders are looking for movement, as well as compelling expected returns, the DAX has become relatively sanguine and equity index trader capital have flocked towards the US500, US30 and into Asia, notably the HK50. Although, volatility in these markets is considered far from lively.

(DAX 30 daily chart)
c1a00e8e-ca9b-4046-bfee-dae89517f8f3.png

We can look forward, where options pricing shows implied measures of volatility not far off multi-year lows – however, one questions if this volatility is priced incorrectly and with some big event risk on the horizon, it’s not hard to envisage a world where this dynamic changes, volatility rises and the GER30 becomes one of the most traded equity indices in our universe of index products by retail traders. 

Catalysts to make the GER30 fire up again

The list of volatility catalysts are building, and whether the traders flow is aimed at longs, or shorts is yet to be seen, but we see a highlight symbolic election on 26 September that could get protracted and messy. The ECB is moving closer to a world where they slow the pace of asset purchases (under its PEPP program). Perhaps most importantly there are major changes in the composition of the DAX that may change both the volatility in the index, but also the attraction of the index and the underlying constituents for foreign investors. 

The main change is that 10 new companies will be entering the index on 20 September  effectively making it the DAX 40. Along with other measures, these additions constitute the biggest change in the equity index since its inception in 1988. Incoming corporates include Airbus, Siemens Healthineers, Porsche, Puma, Zalando, Symrise, Sartorius, Hellofresh, Brenntag and Qiagen. 

Airbus is the biggest inclusion with a market cap of E89.9b, with Siemens Healthineers the next, with a market cap of E66B. 

By way of index composition – adding 10 new stocks reduces the concentration risk we see from having 30 stocks and by increasing the market cap by over E350b, the added diversification, in theory, lowers the variance. However, the additions challenge the way investors look at the German DAX – consider that 40% of the index constituents pay an expected dividend yield of over 3% and that can be influential on the broader index as the DAX is quoted as a total return index – that is, the price you trade reflects both the move in the price of the underlying stocks but also the dividend returns. 

By diluting the weighing of some of the higher dividend-paying stocks and increasing the weighting towards growth we may see the index command a higher P/E multiple, and have a higher beta to other markets, with increased volatility. It may even make international investors look twice at the index and re-establish the German DAX as a front-of-mind instrument for traders once again. 

The GER30 as a play on global growth

We can see the index will maintain a strong weight towards international cyclical stocks with a skew towards chemicals, industrials, and technology. Over 75% of GER30 (soon the be GER40) corporates derive sales from outside of Germany, and one could argue the new additions increase the global international exposure, notably towards Europe and China. 

After the inclusion, the GER30 index becomes even more sensitive to world traders than the S&P500, FTSE100 and other major EU bourses and holds the highest beta of equity returns to world trade – this means if we do see global growth being called into question on a more sustained basis, which I’d argue is playing out now, the DAX may well underperform and attract greater short-selling interest.

It all suggests a livelier environment in the months ahead, and with our reduced spreads on the GER30 and industry-leading top of book liquidity, put the GER30 on the radar for increased movement – because movement results in opportunity for traders.

GER30 Strategy sessions

One strategy I’ve been looking at on the DAX is a short-term mean reversion model – I have optimised the settings to give the best results – and while over fitting is an issue the sample size is solid. Here, I wanted to buy DAX futures (what our GER30 is priced off) when the 2-day RSI is < 10 AND the index was above its medium-term moving average (the system suggests 81 days is best). I wanted price to rebound into the 9-day EMA as a profit target.

fb639052-7679-4c8d-ba32-c07233f51e65.png

The results are since 2000 I would have placed 122 trades, with a 78%-win ratio. The average win/loss are balanced, so the returns are strong and beat a buy and hold strategy before costs. The settings can be changed on shorts, where a 10-day EMA seems to work bests as a profit target.

Past performance obviously doesn’t guarantee future results and automated strategies incorporate many assumptions.

Hi @Caseynotes

Thanks for this post on the DAX update, interesting read especially on the main change is that 10 new companies will be entering the index on 20 September effectively making it the DAX 40.

For more information on Germany’s DAX Index price reweighting to include 40 shares check out the blog post below:

 

All the best - MongiIG

  • Like 1
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On 06/09/2021 at 22:32, Caseynotes said:

Interesting blog on Dax and the upcoming September changes.

By Chris Weston (ex IG)

 

 
Dear Trader,
 


The GER30 - trading the biggest shakeup to the DAX since 1988
 

 
The German DAX (GE30 on MT4/5) has for long periods been seen as one of the great instruments for index traders, often getting the lion’s share of any of the European and global indices from retail traders. 

However, in recent times we’ve seen the 10-day realised volatility fall to 5% and the lowest levels since May 2019, while 30-day volatility (now 7.11%) resides at the lowest reading since 2017. These measures of index volatility and movement also show that volatility in the German DAX is indeed lower than any other major equity index.

In a world where traders are looking for movement, as well as compelling expected returns, the DAX has become relatively sanguine and equity index trader capital have flocked towards the US500, US30 and into Asia, notably the HK50. Although, volatility in these markets is considered far from lively.

(DAX 30 daily chart)
c1a00e8e-ca9b-4046-bfee-dae89517f8f3.png

We can look forward, where options pricing shows implied measures of volatility not far off multi-year lows – however, one questions if this volatility is priced incorrectly and with some big event risk on the horizon, it’s not hard to envisage a world where this dynamic changes, volatility rises and the GER30 becomes one of the most traded equity indices in our universe of index products by retail traders. 

Catalysts to make the GER30 fire up again

The list of volatility catalysts are building, and whether the traders flow is aimed at longs, or shorts is yet to be seen, but we see a highlight symbolic election on 26 September that could get protracted and messy. The ECB is moving closer to a world where they slow the pace of asset purchases (under its PEPP program). Perhaps most importantly there are major changes in the composition of the DAX that may change both the volatility in the index, but also the attraction of the index and the underlying constituents for foreign investors. 

The main change is that 10 new companies will be entering the index on 20 September  effectively making it the DAX 40. Along with other measures, these additions constitute the biggest change in the equity index since its inception in 1988. Incoming corporates include Airbus, Siemens Healthineers, Porsche, Puma, Zalando, Symrise, Sartorius, Hellofresh, Brenntag and Qiagen. 

Airbus is the biggest inclusion with a market cap of E89.9b, with Siemens Healthineers the next, with a market cap of E66B. 

By way of index composition – adding 10 new stocks reduces the concentration risk we see from having 30 stocks and by increasing the market cap by over E350b, the added diversification, in theory, lowers the variance. However, the additions challenge the way investors look at the German DAX – consider that 40% of the index constituents pay an expected dividend yield of over 3% and that can be influential on the broader index as the DAX is quoted as a total return index – that is, the price you trade reflects both the move in the price of the underlying stocks but also the dividend returns. 

By diluting the weighing of some of the higher dividend-paying stocks and increasing the weighting towards growth we may see the index command a higher P/E multiple, and have a higher beta to other markets, with increased volatility. It may even make international investors look twice at the index and re-establish the German DAX as a front-of-mind instrument for traders once again. 

The GER30 as a play on global growth

We can see the index will maintain a strong weight towards international cyclical stocks with a skew towards chemicals, industrials, and technology. Over 75% of GER30 (soon the be GER40) corporates derive sales from outside of Germany, and one could argue the new additions increase the global international exposure, notably towards Europe and China. 

After the inclusion, the GER30 index becomes even more sensitive to world traders than the S&P500, FTSE100 and other major EU bourses and holds the highest beta of equity returns to world trade – this means if we do see global growth being called into question on a more sustained basis, which I’d argue is playing out now, the DAX may well underperform and attract greater short-selling interest.

It all suggests a livelier environment in the months ahead, and with our reduced spreads on the GER30 and industry-leading top of book liquidity, put the GER30 on the radar for increased movement – because movement results in opportunity for traders.

GER30 Strategy sessions

One strategy I’ve been looking at on the DAX is a short-term mean reversion model – I have optimised the settings to give the best results – and while over fitting is an issue the sample size is solid. Here, I wanted to buy DAX futures (what our GER30 is priced off) when the 2-day RSI is < 10 AND the index was above its medium-term moving average (the system suggests 81 days is best). I wanted price to rebound into the 9-day EMA as a profit target.

fb639052-7679-4c8d-ba32-c07233f51e65.png

The results are since 2000 I would have placed 122 trades, with a 78%-win ratio. The average win/loss are balanced, so the returns are strong and beat a buy and hold strategy before costs. The settings can be changed on shorts, where a 10-day EMA seems to work bests as a profit target.

Past performance obviously doesn’t guarantee future results and automated strategies incorporate many assumptions.

Great  post!

 

Without planning it I have sort of evolved into a mean reversion specialist on the Dax.  The last 90 days on the Dax looks like this for me. Happy to reply to any questions.

878161059_Screenshot-9_12_202110_30_03AM.thumb.png.f2638cf95dae14f9e03ba1e1ec780261.png

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