There is a large cluster of turns due tomorrow, mostly in US equities, with a very small contribution from European indices. This turn seems to have no significance for Asia at all, which is no surprise as the general linkage between the equity markets around the world has lately loosened. That seems odd and the links will probably strengthen again before long.
This turn comes as US markets are ranging, so we cannot say if we expect a low or high point. There have also been daily-scale compressions in the last 24 hours, which always mean that a new trend is imminent so markets are poised on a knife-edge.
We still think that prices are likely to fall in the medium and longer-term so we are inclined to stay short in the US with stops just above the levels of these compressions:
European markets have mostly been weaker than the US and we have seen two daily-scale bottom extensions, in Greece yesterday and in Finland a few days ago. Some Asian markets have also made bottom extensions, arguing that a re-bound is likely. Accordingly, we advise covering European shorts on weakness into tomorrow and waiting.
We may see a chance to make some purchases and (if so) we will recommend the German market as the best candidate, again.
Some commentators have begun to recommend buying Spain, Italy and the other S. Europeans as they now seem cheap compared to Germany. We think this misses the point. The single European currency has made Germany more prosperous and has impoverished the Southern countries, as we often remark, and the effects are long-term. The adjustments needed to counter this are slow in coming and may never be fully achieved. Don’t buy assets in these countries unless you want a cheap holiday home. Asking prices of good properties at La Manga resort in South east Spain (popular with sun-starved North Europeans) are still falling and are now down by over 60% from 2008 levels. We will continue to recommend selling the Southern European equity markets whenever there is reason to sell anything in Europe and choosing Germany whenever we see a reason to buy.
Energy markets continue to compress. We have been looking for a chance to sell these for some time and thought that the sell signal in Copper might also occur in energy. It hasn’t so far, so we wait. Here is WTI crude:
There is an energy turn due tomorrow which might coincide with the break from these compressions, but we cannot tell which direction breaks from compressions will take. If you share our bearish view of ‘industrial’ commodities then it may be worth taking a small short position here, being prepared to add to it if prices fall down through the compressed areas. An upward break would signal that another rally has started, so we would place quite close stops. It is dangerous to anticipate breaks from compressions, so only do this if you are a risk-seeker.