- New Science in old markets -

Stocks still stuck, bonds in support. German property and nat gas

The next cluster of turns in equities and bonds is due on Monday, the 20th August and this includes a turn from the long-term Dow industrials index series and its fixed-income equivalent, the long-term Dow US bond index. This cluster is only a grade 3 when the usual European, US and Asian index inputs are considered but the inclusion of these two longer-term Dow stock and bond index turns means that we should treat it as being a bit more important.

Trends into turns are vital when determining whether a turn will mark a high or low point. Bonds are trending down and we have advised being short in both the US and German bond markets, looking to cover or protect profits at around the levels of an old compression in bunds. This level has now been reached (see below) as I write (3.30 p.m.) and so we now suggest taking some protection. It may be worth just placing a close buy-stop and to try to 'run the profit' for a few more days, as the down-trend seems to be steepening so these markets may make the actual low point at the upcoming turn.

The situation in US/European stocks is much less clear. In most indices there has been some recent upward movement, but these trends are only slight and the situation is further complicated by continued weekly-scale compressions in several US indices, as reported last week (update below).  Compressions effectively mean that the trend is ‘flat’ at that time-frame, so even if prices have drifted higher, any apparent short-term uptrend is ‘trumped’ by these weekly-scale compressions. A short-term equity trade may be possible at this upcoming turn (we will advise) but we still cannot tell what the longer-term will bring. It pays to be patient at compressions – we have been here many times before – and not to get distracted by short-term movements that can lead to ‘whipsaw’. A trend will develop soon and we will catch it early.

The situation in the far-East is also quite mixed and we will treat each market there separately. China seems to be immune to the influences of other markets, as it has experienced no strength in the recent rallying phase seen elsewhere and is still falling away from weekly-scale compressions reported to you in June. These have another few weeks of useful life and so we still can’t provide the long-awaited ‘China buy’ advice. Here is an update:

There has been an article on German real estate on CNBC http://finance.yahoo.com/news/next-safe-haven-europe-german-105145996.html that argues that prices have been rising because of the ‘safe haven’ status of this asset. Wrong reason. We have been urging readers to buy German assets for several years. Our argument is that the Euro exchange rate and interest rate are far too low for Germany’s economic situation and that this would lead to a boom and then a bubble, especially in real estate. This is now generally accepted as fact but was not recognised by other commentators until this year.

Real estate is not historically regarded as an investment asset by most Germans which meant that prices had not yet begun to rise when we started to recommend it. Since then, the first German real estate boom in living memory has begun and prices are now accelerating. Munich probably rose by 20% last year and has done so by the same amount already so far this year. The linked article mis-states the appreciation, probably by using national average figures where city-specific data is needed – this boom is restricted to populous ‘hot-spots’, as noted. Some quoted vehicles have done even better, as this chart of TAG Immobilien shows:

We detect no sign of a long-term 'top' in these buoyant German city real estate values but we are monitoring various relevant instruments. If you have a favourite, tell us and we will add it to our list.

We mentioned that natural gas futures are compressed at a weekly scale, now here is the chart. This market had already produced monthly-scale (!) bottom extensions (also shown) meaning that you should ‘buy dips’ for many months to come – possibly through mid-2013. The market has now dipped but this new compression could still break either way. The down side seems limited (because of those monthly extensions) and so it may be best to shut your eyes and just buy here – there is certainly potential for a much greater up-move than we have yet seen.

A report on grains will follow soon.