Can the Dax rally last?

German blue chips have almost tripled since the bear market bottomed in March 2009, with the Dax index now at a new record peak around 10,000. But the air is getting thinner, as Wirtschaftswoche puts it.

Technical analysts have noted that market momentum has ebbed in recent weeks and stocks have become more vulnerable to pullbacks. Things look worrying from a fundamental perspective too.

Like its major global counterparts, the Dax is less a domestic than a global barometer. Most of the 30 firms in the index are large exporters and around 75% of all the firms’ sales are made outside Germany.

While 69% of goods went to European countries last year, emerging markets, especially China, are becoming increasingly important. China is Germany’s fifth-biggest export destination and about 15% of earnings are China-related.

That means the DAX would be vulnerable if there was a financial crisis in China – something that many pundits expect.

The Ukraine crisis is another concern. Germany will suffer if the West imposes tighter sanctions on Russia and Russia retaliates. A sanctions spiral could cause German exports to Russia to slump by 50% by 2015, reckon analysts at DW Bank.

Dax index chartGermany would also suffer from the impact on the rest of the continent: Russia is the EU’s third-biggest trading partner, accounting for 7% of exports. The Dax would also be likely to fall if Wall Street went into reverse. That’s because New York tends to dictate the direction of other world markets.

What’s more, the German stock market is one of the world’s more cyclical markets, and that makes it more vulnerable than most to a bout of global or European risk-aversion.

All this could easily be shrugged off if valuations were cheap – but they aren’t. The index looks pricey on 18 times 2013 earnings. The forward price-to-earnings ratio is 13, but this figure is based on unrealistically high earnings estimates that ignore the unspectacular growth in the world economy.

Investors who have enjoyed some or all of the Dax’s roaring bull run should take some profits.