If risk-on is the game, then remember the DAX
As I wrote in Watch Spanish Yields there's a statistical relationship supporting DAX investment decisions, either alone, or versus S&P500.
Two days ago I posted some charts supporting the theory that investors should not completely become perma bears. Nevertheless, there are extremes in the market at the moment and somehow these have a tendency to catch us off guard.
Following on from my theory though it is interesting to see the relationship between the yield change in Spanish 10-year yields and the DAX vs S&P500 in chart 1.
At the moment we see that bond yields in both Spain and Italy are quickly dropping - down 18 basis points yesterday – but this is after an extended period of rising yields, see chart 2.
This continued pressure on Spain has had an expected negative influence on the DAX versus the S&P500, as shown in chart 3. The DAX has lost 7 percentage points to the S&P500.
If we see an extended period of more risk-on in the coming months then perhaps you should consider the DAX as a way to invest. By doing this you will receive the full potential of a catch-up in the DAX compared to investing in the S&P500.
An alternative strategy could be going long DAX versus S&P500, which should be less risky as illustrated by a 7 percent drop (difference between the two lines) instead of an outright 11 percent drop (drop in DAX blue line). This could be different in the coming months, but as the markets are driven by common factors investors should expect lower risk.
It is important to understand that this is not an endorsement to take on risk but some thoughts on alternative investment strategies which could be pursued in the current market environment.