- New Science in old markets -

The state of fear

We have remarked that the prevailing mood in investment circles in general and markets in particular has been that of dread because of some impending apocalypse or other. This goes some way to explaining the current mania for bonds, pushing entire yield curves into negative territory, but that has more to do with the Japanification of bond markets in a world where QE exists, as we wrote a few months ago.

This state of anxiety is hard to reconcile with the levels of stock markets, most of which are at or near recent highs, which in some cases means all-time highs.

This seems to us to be a case of hypochondria or what doctors more kindly call the 'worried well'. Yes, things are not ideal in those parts of the world covered by headlines - no Brexit deal in sight, China and the US still punching each other with tariffs, pending trade squabbles between the US and Europe and the US and Japan (and the US with anyone, frankly).

The actual economic impact of all this has been slight so far and the world economy is growing nicely with very few wars and steady population growth. It is a conceit of politicians and lawyers, amplified by journalists that trade only happens with benign governments acting together to provide a friendly framework. In fact business is driven by far more profound forces than that as anyone who has seen people go shopping in a hot war zone can affirm. We think the gloom is overdone and now we have some evidence from the bond markets to back this up. There have been monthly-scale extensions in US notes and bonds:

5, 10,30 year monthly exts

As bond prices rise, so their yield falls and this collection of three signals is a 'hat trick' of the most watched parts of the US treasury yield curve. Monthly signals are too long-term to be much help when trading (a second extension in a row could mean a big further move) but they do give valuable perspective and the message from these extensions is that this bond move is nearing an end. Too much fear for too long...?

If fear has been overdone, we should expect that other markets should now rise and this is indeed happening. We reported last week that stock markets were compressed and those compressions are now either breaking upward or have already done so. An update, starting with a German index,  Swiss index futures and Nikkei futures, all of which featured in our last edition and all of which have pushed up from their respective compressions:

MDax, Swiss, Jap comps cont

US indices continued to compress after the signals reported in our last edition but appear to be breaking upward today as I write - two hours before the NYSE opening. I say 'appear' because we need to see a closing break before we can be confident that the move has begun. Here are updates on two of the three US index compressions from the last edition, with a Canadian index replacing the Dow industrials, which has yet to break because it is not yet open today:

S&P, Nasdaq & Can comps

Commodities too should benefit from this 'relief rally' and we will write more on that in the next edition.

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