German Tech Stocks – Sell-Off Overdone or Just Begun?

“Alles ist seinen Preis wert” – German Proverb

The above quote, translated for those like myself that don’t understand a lick of German, means that everything is worth its price.

The TecDAX, an index introduced in 2003 that follows the 30 largest German Technology stocks, was up 20% in 2012 and another 38% in 2013.  It was continuing a similar trajectory through July 3^rd of this year, but since that time is off -12% making the index flat for the year.  With apologies to the German proverb, has the correction been overdone or has it just begun?

The short term outlook is quite gloomy.  German factory orders fell in June, and industrial output barely rose month over month and was well below forecasts.  There are huge ongoing risks with the conflict in Ukraine and with Western sanctions against Russia given Germany’s dependence on them for Nat Gas.  Macroeconomic issues seem to be proliferating again with the EU including the recent bailout of Portugal’s largest bank and Italy once again slipping into recession.  To add fuel to the fire, we now also have rising tensions in Iraq.

This does not seem like a good entry point, but what does history tell us?  That is, when we see this type of correction in German Technology stocks what usually happens next?

Since the index is fairly young, we only have 11 years of history but we were able to find 9 similar instances of a short term correction of this magnitude.  In 8 out of the 9 instances, the TecDAX is up in the next 1 month and the average return is 3.3%.  The only down occurrence is from June 2011, when the index was down -4.4%.  Charts below.

Haben eine tolle Woche! (have a great week)

Chart of the most similar historical instances of the current 3 month price trend in the TecDAX 

Projected 1 month forward return based on the 9 most similar historical instances