- Germany's DAX hit a fresh all-time high on Monday in what's an encouraging sign for the US stock market.
- Germany has the fourth largest economy in the world, and it traded a combined $200 billion of goods with US in 2021.
- "The S&P 500 and DAX are positively correlated, and while the DAX has historically lagged the S&P 500, the recent outperformance should continue."
Germany's stock market hit a new all-time high on Monday, and that's a great sign for the S&P 500, according to Fairlead Strategies' founder Katie Stockton.
The Deutsche Boerse AG German Stock Index, better known as the DAX, consists of the largest 40 publicly-traded companies in Germany and closed 0.21% higher on Monday to a record close of 16,794. This follows a record high reached on Friday.
Because stock markets are leading indicators of the economy, it's an encouraging sign that Germany's stock market has hit a record high. And it's good news for America's stock market given that the two countries traded about $200 billion worth of goods in 2021.
Germany is the fourth largest economy in the world and a close ally to the US, so it's no surprise that over the long-term, both countries' stock markets tend to move in tandem.
"The S&P 500 and DAX are positively correlated, and while the DAX has historically lagged the S&P 500, the recent outperformance should continue," Stockton told Business Insider on Friday. "We wouldn't normally look to the DAX for leadership pertaining to the US, but it is providing a good example (of a breakout to new highs) for global equity markets."
The DAX confirmed its breakout to record highs on Friday, when it closed above its final resistance level of about 16,290. The index has surged 3% since it cleared that resistance level in late November to a new high of 16,794.
"The breakout is a bullish long-term catalyst for Europe's largest economy," Stockton said.
In a Friday note to clients, she also said to expect the S&P 500 to continue following the DAX higher, rather than leading the DAX higher.
The S&P 500 is still about 4% below its record high reached in January 2022, but it did stage a bullish breakout on Friday above the key resistance level of about 4,600. If the S&P 500 can decisively close above this level at the end of the week, expect more gains to continue, according to Stockton.
"We would see this as a bullish long-term indication, with the next and final resistance for the S&P 500 at its January 2022 high," she said.