- New Science in old markets -

Stock and bond update, grains extend more, sell copper

We wrote last week that bonds and bunds should be bought on dips. This counter-intuitive view coincides with our recent advice to buy stocks in almost all parts of the world, having picked the US Korea and Germany as the ones to buy first. It has been the background assumption for many market observers that asset prices have been ‘pumped up’ by central bank activity and so there is the risk of falls across the board in equities bonds and probably real estate when the nozzle is withdrawn. That may be true in due course but we have just seen a new source of support declared by the European Central Bank with the hint that there will be more to come.  Despite the well-advertised leaking of this policy before yesterday’s announcement, stocks and bonds both firmed in Europe and rose even more in the US since then.

 

Dax and SPY break up

 

We are not economists so our reading of our signals determines what we write – The US and German equity markets broke above daily-scale compressions during May, so starting at least a short-term uptrend. These two and Korea are now trading just above weekly-scale compressions and Japan has also now made a similar break upward. We can assume that ‘lift-off’ has occurred and new uptrends have begun, so we would now add Japan to our list of ‘longs’:

 

various weekly equity comps upward

 

One word of caution - the break of a weekly signal must be at a weekly scale meaning that the market must close above it at the week’s end. We have anticipated this break a little in the cases of the US and Germany for reasons given in the May 22nd edition but there still hasn’t been a conclusive break. There is a turn due today as published earlier in the week that could mark a high that reverses these gains. It may equally well mark the break up from these compressions so we stay bullish until we have a reason to stop.

The situation in US bonds is similar. We pointed out last Friday that bond and note yields had pushed down through weekly-scale compressions to start the present downtrend in yields (uptrend in prices) and that dips in price should be bought – meaning that these compression areas would provide that opportunity, if approached.  Yesterday’s low point in futures brought the ten-year very close to the nearest of these supports and so provided just such an opportunity. We assume that you are now long – if not, buy both the ten year and the thirty-year now. Charts:

 

Bond and Note weekly comps2

 

There have been some other signals too. More grains have extended. Soya bean oil made a bottom extension on Tuesday and bounced while Corn made one yesterday. Wheat has continued to fall while generating further bottom extensions on the way. All this trends to confirm that there will be a rebound in grains soon but we were a bit early in advising wheat purchases on the first extension:

 

Grain bottom exts

 

Copper has fallen away after rallying close to the resistance we identified in the May 20th edition. It fell 6 cents short of the beginning of resistance and so we did not get a chance to advise short-selling on the rally. Now it has compressed and continues to drop. This break of a compression is a ‘sell’ signal and so we advise selling short now. Rallies should find resistance at the compression level, starting at 3.08:

 

Copper compression