- New Science in old markets -

Cattle, gold and equities

Live cattle and feeder cattle have diverged over many months.  Both have risen for a year but feeder cattle have done so much more and are now very costly compared to live cattle. This is mostly because the cost of feed has been very high lately and over the eight months taken to convert yearlings into fat cattle for slaughter many operators have made losses. The difference is now approaching historically ‘stretched’ levels:

 

We are also seeing daily and weekly-scale top extensions in feeder cattle and so it seems likely that the rise is soon to be (or is already) over:

Trades can now be adopted to position for that outcome; short-selling feeder cattle being the most aggressive way to express this view. Others are: selling feeder cattle and buying live cattle, so expecting the difference to narrow; selling live cattle short, although the prospects for a decline may be less than for feeder cattle the risks are also less; selling call options in either; selling calls in live cattle to buy puts in feeder cattle - this last is probably the best risk/reward strategy.

Gold has been compressing at a daily scale for a while, as shown in the first chart below and it seems likely that a new trend will soon start. In the February 3rd edition we pointed out a monthly-scale bottom extension in a gold mining stock index that had occurred in June 2013 and the second chart shows an update:

 

                                                  

That mining index signal is approaching the twelve-month mark at which monthly signals start to lose force so a break downward from these new daily-scale compressions can be sold short without worrying too much about this old supporting influence. As we said in that February edition ‘...this looks just like every other commodity bubble there has ever been in which the price falls all the way back to the starting point.’ This remains our view and the eventual declines will start with just such compressions as these. Is this it? We cannot tell but will wait for the break, as usual in compressed conditions.

US equities maintained most of their gains yesterday, meaning that many indices closed above the compressions reported in yesterday's edition. We advised readers of our intra-day service to 'jump the gun' and buy after the first half of the session even though we usually prefer to wait for a closing break of compressions. Now that another day has elapsed, it may be prudent for longer-term traders to wait until nearer the close today before also taking long positions, just to make sure that there is a weekly closing break too.

In Europe, there is resistance a little bit above here from the compressions that broke downward mid-month. If markets do rebound back up to these levels, this will provide the usual 'second chance' that compressions sometimes offer and new short positions can be placed in the usual candidate markets - the Southern Europeans. Italy has been the weakest lately but the bigger picture shows that it has rallied from the mid-2012 lows back up to the monthly-scale compression that marked the last big decline. We expect resistance at old compressions at every scale, so this is a very good reason to assume that short positions in Italian equities may be profitable for many months to come:

We have often written on the separation between the successful German economy and the impoverished Southern economies, caused by shackling them together in the Euro. This makes a nonsense of talking about the 'eurozone economy' as if it were one entity and the dividing forces that were set in motion by currency union are still strong - in fact are getting stronger. This means that we still expect to advise buying German assets on dips and selling Southern markets on rallies for some time to come. Sometimes it will be possible to hold both positions and see both making headway but as yet we do not have a fresh reason to buy Germany. The daily and weekly German equity index compressions reported in the May 13th edition have not yet broken, but if they break upward we will advise taking long positions.

The situation is the same in Japan- still compressed at daily and weekly scales but Korea has broken upward and can be bought:

Although it has broken these weekly compressions to the upside, it is trading at the top end of its recent range so it may be prudent to try to buy a dip of 1 ½ -2 ½ % from here.

More soon

RE