There has been some weakness in equity markets in the last week but it has not been uniform. The US has moved from the top end of its recent range to the bottom as best shown here in the Nasdaq while Italy and Spain have dropped sharply, by 8% and10% respectively. We have repeatedly pointed out the vulnerability of these two in prior editions and there is a longer piece on the same topic on our website http://hedcapital.com/assets/docs/berlinbrixtonandbarcelona.pdf with a semi-serious proposal to fix the embedded problem. China has gone its own way and has made new highs for this move practically every day. This is now making top extension signals again, so a reaction within the uptrend is now likely.
The magnitude of the drop in Spain (and Italy) can best be shown as a ‘spread’ chart, below. The bottom purple line rose sharply as Spain fell more than Germany. The hope that was spread by the resolve of the Euro-authorities to ‘stand firm against the markets’ by pledging to do all that is necessary to preserve the Euro has merely served to prolong the misery for the poor inhabitants of these countries, doomed as they are to the consequences of un-competitiveness. This spread will widen more. Keep buying German assets on dips and keep selling Spain, Italy, Greece and now also France on rallies.
This drop in many stock markets comes against the backdrop of a great deal of market commentary telling us that there is a large-scale investor shift out of bonds into equities. If true, this would indeed be a bullish influence on equity markets but such commentary usually lags after the fact. Short-term sentiment was generally bullish two weeks ago, as measured by the top extensions that we saw in many places and reported at the time. Extensions mean that there is a consensus in the market. It is possible for prices to move higher when there is such general agreement among market folk but it is not possible for it to happen immediately. We are dipping and will probably dip more as the first chart shows – that Nasdaq compression break probably means that a new down-move is under way here that should bring prices low enough to buy again. Then a further up-move can occur, as we have warned since the Dow transport index broke up from its weekly compressions a few weeks ago.