- New Science in old markets -

Equities, Bonds, gold and a note about the Eurozone

There have been weekly-scale top extensions in some US equity indices for the second week running. The main example is from the Dow, shown here in both cash and futures versions:

dow-weekly-top-extsThese signals argue that the present rally will soon stall and that you should be preparing to exit longs and establish short positions. There is a seasonal tendency for prices to rise in the last few days of December, which seems to be happening again and this offers a good chance to sell strength. It may well be that better opportunities exit to sell other markets -  in Europe for example - and we are currently selling the German Dax.

The Dax has recently made daily-scale top extensions, so too has the MDax mid-cap index:

dax-mdax-daily-top-exts

These are not unique - there are similar recent top extension signals in France, Sweden and Finland with slightly older signals in Norway and Italy but Germany is in a different position from these other Europeans.

The single Euro currency has been as good for Germany as it has been bad for most of the others in the Euro zone. Southern European countries have been shackled to Germany (the world's leading exporter) at exchange rates that are too high for them to compete with it and no possibility of devaluing themselves back into a competitive position - which was their old remedy. Germany on the other hand has been given a tremendous boost by being in this currency union with weaker economies as interest rates and the exchange rate have been kept very low. This could all change in the coming months as the effects of the recent Italian referendum and the forthcoming French presidential election are felt. Both these countries have strong anti-Euro movements that could win elections and it is possible that the break-up of the Euro currency is a very real prospect in the next year or so. Germany would suffer most as these advantages suddenly disappear so we will be trying to find places to establish precautionary short positions to take advantage of this situation as it develops. This is our first attempt. Normal discipline will apply and we will place protective stops on each occasion.

Elsewhere US bonds have stopped falling after some daily and weekly extensions, as reported. An update:

bonds-weekly-and-daily-exts

These signals have not been very precise and this probably reflects the 'managed market' that bonds have become in the last few years. The crowd movements that we measure are still important but are pushed into the background by the dominant activities of central banks. It is true that the Fed hasn't been buying new bonds lately - only re-investing the proceeds - but the establishing principle of their giant bond-buying program was two-fold:

  1. Buy bonds to push money into the system   - a kind of super-repo
  2. Hold on to those those bonds to keep yields low - they saw the holding of bonds to be as important in pushing rates down as buying them in the first place

The Fed still holds an enormous quantity of bonds and (by their estimation) this should continue to keep yields low and prices high, no matter what happens to short-term interest rates. This probably means that we should not be too quick to call for the end of the bond bull market that has been going on since the 1987 stock market crash. We have tried to buy bonds in the past few weeks but 'timed out' of the trade for a loss. We will probably try again soon.

Gold has also made a weekly-scale bottom:

gold-weekly-bottom-ext

This market has disappointed many by falling from its mid-year highs. It now looks as though the drop is at or near an end and we will be trying to buy it again soon. We tried a few weeks ago because of some daily-scale bottom extensions and 'stopped out'  for a loss but this new longer-term signal has a shelf life measured in months so we will look for an additional short-term reason to establish a new long position in the days ahead.

All signals generated by software supplied by our friends at Parallax Financial Research www.pfr.com