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CAC 40 Market Regime Report: Why French Stocks Are Still Not a Buy Yet!

Market Regime Newsletter

A quick glimpse into our market research

Sample Research

Here’s a sample of our Market Regime Newsletter, where we analyze specific markets using our precise approach. This showcases our consistent research and enables users to efficiently apply our indicators and tools to any market.

Key Points:

This Market Regime Newsletter was issued on December 1st, 2024

  • The CAC 40 is currently trading at a steep discount, with a Price-to-Earnings (P/E) Ratio of 18.9x compared to the S&P 500’s 30x.
  • The French stock market appears increasingly cheap, attracting growing interest from value investors.
  • However, despite this attractive valuation, our data indicates that French stocks are not yet a buy.
  • Historically, the CAC 40 has had a win rate below 30% in similar situations.

Driving Forces Behind the Current Market Outlook:

Our research is grounded in a comprehensive analysis of multiple indicators with high predictive power. These indicators cover the most essential performance factors, including trend, trend quality, sentiment, and the positions of both smart and dumb money. Profitable market regimes are determined by the percentage of positive signals among these indicators, taking their respective timeframes into account. In total, we define six predefined regimes ranging from “Very High Reward” to “Very High Risk,” each with its own distinct risk-reward characteristics. This framework enables investors to swiftly adapt their portfolios to new circumstances.

The flow chart for the French stocks (CAC 40) show minimal positive signals across critical metrics such as trend, trend quality, and sentiment

As illustrated in the flow chart above, French stocks (CAC 40) show minimal positive signals across critical metrics such as trend, trend quality, and sentiment (including smart- and dumb-money positioning). While some positive signals, particularly in sentiment, do exist, the overall market condition for French stocks (CAC 40) remains grim—at least for now.

The flow chart above is a powerful tool for analyzing indicator signals by category and timeframe, helping to identify the current trend’s strength and direction.

Analyzing the Aggregated Indicator Signals of French Stocks Over Time:

Aggregating these signals by their underlying timeframe allows us to effectively monitor the market’s health over time. More specifically, our Market Health Indicators are composites of trend, trend quality (also known as breadth), and sentiment signals (including Smart- and Dumb-Money signals) for specific timeframes. The chart below displays the performance of French stocks (CAC 40) in the first panel, followed by three subsequent panels that detail the short-, mid-, and long-term Market Health trends over time.
Scores are measured on a 0 to 100% scale, with values above 50% indicating a positive outlook and values below 50% indicating a negative one.

Market Health Indicators are composites of trend, trend quality (also known as breadth), and sentiment signals (including Smart- and Dumb-Money signals) for specific timeframes

With our Short- to Long-Term Market Health Indicators strongly below 50%, the market environment for French stocks is predominantly negative. While the cheap valuations of French stocks may tempt investors to bottom-fish, there is currently no compelling reason to do so.
Persistently negative Market Health Indicators suggest that French stocks could still face significant declines from current levels. Although the strong downtrend might experience temporary interruptions by limited oversold bounces—defined by isolated positive Short-Term Market Health readings—the risk of further waterfall-like declines remains high as long as Mid- to Long-Term Market Health shows limited signs of recovery.
Even without substantial near-term declines, the likelihood of significant underperformance against other global market indices remains notably high.

How to spot high-reward & low risk market opportunities

3 Steps for Determining Market Regimes

With our structured approach, we can identify the respective market regime for any market. Our methodology include the following steps:

1

Identify Robust Trends

  • Trends are measured through a systematic screening of signals from multiple indicators (for example the WSC Trend Index, the Smart Money Flow Index or the Daily Put-/Call Ratio All CBOE Options)
  • These indicators cover various categories (trend, trend quality, and sentiment, including dumb- and smart-money positioning) and timeframes.
  • This diversified approach minimizes the impact of noise in individual indicators and enables an unbiased and robust view of current market conditions.

2

Monitor Market Health

  • These indicators are representing composites of these signals for three different timeframes.
  • Scores on a 0 to 100% scale denote signal positivity.
  • Values below 50% indicate a negative outlook, while those above 50% signal positive market health.
  • The combination of these health indicators results in market regimes, indicating the strength of the current trend for a specific timeframe.

3

Determine Market Regimes

  • By combining short- to mid-term and mid-term to long-term market health readings, the specific market regime is determined.
  • These Market Regime gauges help identify market regimes and shifts without the hassle of going through all indicator signals.
  • To be more precise, the Tactical Short-Term Market Regime is constructed upon the combination of short- to mid-term market health, while the Strategic Long-Term Market Regime is based on the amalgamation of mid- to long-term market health.

This negative market environment is reflected in our Market Regime Gauges below, which combine short- to mid-term and mid- to long-term market health readings to determine the specific market regime. These gauges simplify the identification of market regimes and shifts without analyzing all indicator signals. The Short-Term Market Regime is based on short- to mid-term health, while the Long-Term Market Regime reflects mid- to long-term health. Each regime has distinct risk-reward statistics, as shown below.

Market Regime Gauges combine short- to mid-term and mid- to long-term market health readings to determine the specific market regime

The Bottom Line and Outlook

With win rates as low as 29.5% in the Short-Term and 32.9% in the Long-Term Market Regime, French stocks remain at risk of further disappointments. Even if the index avoids further significant declines, upside potential is likely to remain constrained by weak readings across the board. Therefore, it may be prudent to delay any bottom-fishing activities, despite the current attractiveness of valuations. As such, the outlook for French stocks (CAC 40) remains unfavorable unless a meaningful recovery in our Market Health Indicators signals a positive regime shift.

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