Two of the main German stock indices that we follow made top extensions yesterday:
This comes as we enter the few days during which we expect a general stock market turn. No other important European or US index has made such a signal yet but this is enough to trigger an immediate ‘sell short’ recommendation in our preferred European candidates of Spain, Italy, Greece and (as of recently) France.
For those who might wonder why we don’t recommend selling the instrument which generated the signal: We have long thought that the European market is not a whole but has been separated into two parts – those that can compete at this Euro exchange rate and those that can’t. Germany and its similar neighbours can whereas those in the South cannot. The national markets of all these countries still move roughly together at the big turns and during the big trends but Germany has an underlying uptrend (so do Finland, Holland etc.) caused by this competitive edge. The Southern countries have downtrends caused by their chronic inability to compete and so we prefer to buy Germany when we get any kind of buy signal from Europe and sell the South whenever we get any kind of sell signal. So it is here – sell Spain and these others right now. We have added France to the ‘sell’ list because that economy clearly cannot compete under present conditions. This has yet to be reflected in weakness in the French equity market but that will surely come. In the meantime, the easier profits have come from shorting Spain and will probably still do so.
There have been some other top extensions in sector indices in Europe and the US but these are quite commonplace as sectors rotate in and out of fashion. We don’t pay much attention to them as a rule but now that we are in ‘turn time’ they provide some additional clues about the impending end of the current uptrends:
We would not take any additional action yet (except to exit any remaining long positions in Europe and the US) and will report any fresh signals as soon as we see them, hoping to get top extensions in some significant US index in the next day or so.
A word about tactics. Extensions mark the end of existing trends, not the beginnings of new ones. Sometimes of course an uptrend will simply reverse into a downtrend but there is more usually a period in which prices don’t go up any more but simply ‘churn’ in a range. After some time has passed a new trend then begins, which may be downward. We expect some quite weak equity prices in the medium-term because markets are extended at weekly and monthly scales, which usually means a bear move is coming. The drops that we expect may not start right here however as these new daily-scale top extensions only tell us ‘no more up’ not ‘downwards immediately from here’. This is one reason why we choose the markets of southern Europe as our favourite candidates to sell – they are more likely to drop immediately when Germany stops rising. All these ‘Western’ equity markets will have difficulty in sustaining rallies from hereabouts but, just as predators hunt the weaker prey, we prefer to sell the weaker markets.