- New Science in old markets -

Stocks in Asia, US and Europe and a note on Bonds

Stocks are still buoyant in most markets but strongest in Asia, where China has sprinted up almost 15% since three-year lows in early December. Japan too has been stronger, also moving up 14% since mid-November lows and 9% since we advised buying it in the November 16th edition. Both have now extended in the last 48 hours, which indicates that this ‘up-leg’ is coming to an end.

This does not mean that we advise short-sales here although some kind of pull-back is likely. In an uptrend, daily-scale extensions like these will occur at or near the peaks of short-term highs and indicate that some sort of reaction is due within that uptrend. It looks as though these two important markets are now (finally) embarked on those longer-term uptrends so ‘fishing’ for contra-trend little down-moves is dangerous. Let’s wait and see what kind of dip will occur and try to buy it.

Despite preparing in advance for this apparent turn upward in China, we still have not found an opportunity to recommend buying equities there. We still expect to do so, but we must acknowledge that we were caught flat-footed when the rally started. Our apologies for this lapse.

Elsewhere, US and European equities are still mainly firm but we have seen a top extension in Germany and some renewed weakness in Greece after a compression that broke down. Greece is hard to trade so we don’t spend much time on it but it is still a very good prospect for short-sales as the strong, slow forces that pushed it down throughout the last few years are still operating and will not be changed by any short-term financing ‘fix’.

The same remains true of Spain and Italy (and, we think France too) and so these are also ‘short-sale’ candidates. There was of course a top-extension in an important US index that we reported in the December 13th edition and this is still well within its active period.

Rallies may occur but it is highly likely that they will continue to stall for the next week or so. There is an equity and bond turn due on Thursday 20th, as reported so watch out for a chance either to sell equities more aggressively (if it looks like a high) or to cover some shorts if it looks like a low.

To summarise, there have been daily-scale top extensions in the US, Germany, Japan and China in the last week. We regard the extensions in the East as being a chance for a pause or dip but we are not going to advise any short-selling. The US and European markets are quite range-bound and so we have recommended short-selling the US on this extension (combined with a turn). We regard Germany as a very good long-term ‘long’ and so are reluctant to recommend short-selling it despite this extension signal but we still do not like the Southern European equity markets at all so will look for chances to sell them short instead. We may not get anything that triggers this recommendation from our analysis (except that compression break in Greece), so please consider entering short positions with our blessing if your own methods show you such an opportunity in the next few days.

Bonds have been weak, as stocks have been strong and the turn day approaching on December 20th may offer a chance to buy again. The outlook remains for even greater strength in US bonds unless or until these weekly-scale compressions that are currently supporting the market should break downward.

More soon,