The DAX found support today a hair above its 78% retrace to the Sept lows. Meanwhile, the SP500 took out its Sept and year lows today as did the German ETF EWG. The asymmetrical divergence between the German ETF and DAX is largely a function of the DAX being more balanced between longs and shorts and the majority of long-only mkt participants concentrated in the German ETF unwinding their losing positions.

So, 1) the DAX has lost 35% ytd, 2) the German ETF has lost 41% ytd (asymmetrical performance on downside because of its long-only ETF structure) and the SP500 has lost 22% ytd (asymmetrical performance on upside due to the US economy being more insulated from the sovereign debt crises in Europe.)

The XLF (US banking sector ETF) is down -36% ytd. So, the XLF is tracking the German indices decline fairly well on a ytd basis.

One has to consider that the US banking sector carries contagion risk that the Troika has pushed out at least until the Oct 17-18 Summit and quite possibly into the G20 Nov 3-4 meeting or even mid-Nov and beyond. Because the sovereign default risks are considered inevitable (it's a matter of when) and thereby creating further weakness in the EU markets and economies, any short term low that forms in the next few weeks in the German ETF, German Index, and the US banking index can only be considered an intermediate term low forming in the near term followed by a resumption of the bear market in these indices.

It was brought to my attention yd by a long-term client that the most reliable indicator of contagion risk will be found in the DAX and FTSE indices, not the German or Financial Sector ETFs. This makes sense when you consider these ETFs is just concentrated long-only dumb money ETFs.

With the insights regarding the more balanced and therefore more reliable indications coming from the DAX and FTSE indices, below we look at both the DAX and the FTSE (embedded on top of the DAX). We find both the FTSE and the DAX providing intermarket divergences this week, and possibly setting secondary lows at the 78% retracements to their Aug and Sept lows. If these August and Sept lows were to give way in the near term, the initial target would be to anticipate another ~ 10% decline to the 1.41 ratios of the Aug and Sept ranges in the DAX and FTSE.

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