- New Science in old markets -

More equity bottom extensions. Bonds

In the Thursday September 6th edition we wrote that the drop in equities was at or near an end, due to a solitary signal from Belgium . The next day there was a flurry of further bottom extension signals, in more significant markets and in some other minor ones too. The main examples:

Eurostoxx, GB, Spain, Hollsn bott exts

This means that you should accelerate the pace of buying that started on Thursday, looking for (at least) a bounce. Bear in mind that daily-scale signals like these have a shelf life of about three weeks, although there is considerable variation around this average.

There is no equivalent signal in US equities, as there has been much less weakness there - extensions cannot usually occur without a decent prior move, as they have done in these European examples, where there has been a drop of several percent. We suspect that this renewed strength will also affect US markets, so we have re-thought our attitude. We have been waiting for some reason to trigger a sell recommendation but this now seems wrong. The picture below shows that markets broke up from compressions in the mid summer and the recent small weakness now looks like a pullback to revisit those compressions, as is normal. We would buy here, looking for the old highs or quite possible even higher prices.

R2K and Val line ret to comps

The biggest turn of the month is due today (see the turn schedule on the front page) but this could be a two-day turn cluster that started on Friday. If so, this means that a low point has been made at this turn, which is another reason to favour rising equity prices.

Lastly, the US and German government bond markets are both breaking down from new compressions. One of the reasons that these bond markets have remained as expensive as they are in the face of rising interest rates in the US and the prospect of the imminent end of ECB bond-buying in Europe is that they reflect the wariness of investors about the general climate - they are a 'safe haven'. Risks seem to be reducing at the moment (even Italian bonds are rising) and so falling US and German government bonds would add to the general feeling of relaxation that can take stocks higher. If short bonds, as we recommended in the August 21st edition, stay short. One word of warning - the older compressions that are circled in these two charts below may provide support. If these bond markets hold here for a few days (instead of  dropping quite quickly) then we would not hold on to shorts. If they drop a little more, this possible support would be negated and you can stay short for another ten days or so.

US 30 yr and Bund mutiple comps

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