- New Science in old markets -

Signs and portents – monthly tops in Asia

There are signs in the heavens that portend an important change of weather in the markets. We pointed out in the most recent edition that there have been weekly-scale top extensions in the equity indices of the three main Asian economies. These have now been joined by the same signals at a monthly scale:

Jap, Cin, Ind monthly tops

and here are the weekly signals on updated charts:

Jap, Cin, Ind wkly tops2

Such a wealth of top signals makes us hyper-aware of our surroundings and we are looking for any developments that may cause a reversal in these up-trends. Some clues:

  • Bitcoin is once again fashionable and people who should know better have begun to endorse the idea of it as 'digital gold'.  To us it is merely the monetisation of casino chips but this gathering respectability is evidence of the suspension of disbelief that always occurs in periods of market madness.
  • There are massive over subscriptions for Chinese equity funds, as they launch. The FT just reported that E Fund management was offered $36bn against an issue size of $2.3bn. This comes after the China 88 index has exactly doubled in the last 2 years. It is quite normal for foolish investors to 'chase markets higher' but not in this enormous size.
  • The well-publicised 'punishment' of short sellers that is going on in various stock markets is another example of extreme herd behaviour. Gangs of traders, many of them neophytes, are forming to 'squeeze' heavily shorted stocks by concerted buying to force the short-sellers to cover. A severe squeeze is called a 'corner' and these always end badly, as a re-reading of the Hunt brothers' disastrous attempt in the Silver market in 1979/80 shows. Most are fuelled by greed, despite their worthy pronouncements about the iniquity of short-selling.
  • Seers and prophets (many of whom are proud of their 'outsider' status) are widely quoted when the next short-squeeze candidate is being discussed. This is reminiscent of the 1920s when celebrity stock tipsters were household names in the run-up to the 1929 crash. They were always bullish.

None of this helps with 'timing' the upcoming downturn. Our monthly- and weekly-scale top extensions are also quite imprecise (accuracy to within a few weeks is not accuracy, to us) so we will continue to look for daily-scale confirmation signals that will give more immediate clues as to the next direction. It is even possible that prices will rise further in some kind of blow-off speculative frenzy, but the chances of this are starting to diminish. If you began to sell short based on the last edition, keep trading from the short side but be aware that markets don't usually reverse from up to down without an interim period of 'price churning'. Take some profits on shorts and re-sell a rally.

All this advice applies to Asian stock markets. There seems to have been some spill-over into the US and Europe, as prices have dropped a little in both continents, so there is a degree of correlation creeping back into international markets, after some absence. Accordingly, we expect these non-Asia markets to continue to perform similarly and would advise trading from the short side in both, pending some specific US or European shorter-term signals.

Tomorrow we will report on other similar long-term top signals in Copper and Soybeans.

All signals provide by software developed by our friends at Parallax Financial Research www.pfr.com