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Sell bonds, Europe may be breaking up from new compressions

A bond turn is due today, or perhaps was due yesterday. This comes at a time when bonds are compressed at both daily and weekly scales which means they are finely balanced on a knife edge and could go up or down – all we know is that a move is imminent. This compression+turn combination has the effect of ‘turbo-charging’ the compression so that the eventual move will be quick and large so it is useful to get any hint about direction before the break happens. In this case, we have a clue – bonds rallied for two days into yesterday’s high (or three days into today’s) which means we are probably making a high point here at the turn, so this will be an important high. This adds to our slight preference for being short bonds (see October 24th edition where we said ‘sell a rally’) and so we would now establish shorts in the US 30-year and 10-year right here.

Stops can be reasonably close – a bit above the highs of mid-October should be safe enough. We cannot yet tell how large a move is coming, but these instruments are compressed at a weekly-scale, which usually leads to a multi-week price movement.

Elsewhere, stocks have recompressed in the last few days in Europe and are now rallying today, quite briskly. This has been enough to push Germany up through its new compression but not yet the others:

This means that short positions will soon be possible in Spain and Italy (we advised waiting a bit to put those on) and it may be possible for braver souls to buy more Germany now. This is always a good idea in the longer-term and we need little prompting to advise this trade. In the present case, there is no confirmation (yet) from the other compressed Europeans and these markets are several hours away from today’s close. If you buy Germany now, you would be anticipating a closing break of these new compressions and an eventual upward break of the other still-compressed indices shown here. On a more positive note, buying now avoids the need for paying much higher prices if this break continues now. So you should ask yourself: ‘Do I feel lucky?’

More soon,