On Friday morning (the 8th February edition) we pointed out that a turn due that day might end the weakness in European stocks that had been gathering pace since our bear advice in the latter part of January. Publication of this edition coincided more or less exactly with the lows there and we show France as an example:
France has not been the weakest European market – that prize is shared by Italy and Spain which both fell by 10%. These have been our preferred short-sale candidates for many months, as we have often stated and for reasons that you may be bored with hearing (it’s a feedback loop caused by the Euro). We assume that shorts were covered on Friday. We expect to be able to advise short selling again quite soon.
This shift in our view also affects US markets. There had been some top extensions there, at a daily scale in late January and we remarked in the 6thFebruary edition that these were getting a bit stale so to place tight stops on outstanding shorts. US equity indices have not weakened since these top extensions but have merely turned ‘flat’ as sometimes happens after top extensions as prices form a range instead of reversing into a downtrend. Top extensions mean ‘not up’ rather than ‘down’ as explained in our userguide on the website. The US market also rallied on Friday and this has produced a break in two recent compression signals, both in the Nasdaq futures contract:
The initial break in this daily Nasdaq compression was downward - a ‘HEDfake’ we say - but now it has pushed back up through both the daily and the weekly signals, so the uptrend seems to have resumed. Cover any remaining shorts that haven’t already been stopped and buy US equities to go long. There may be dips to come that will provide slightly cheaper opportunities but we have been trying to catch one such and it hasn’t developed, so now we suggest buying ‘at market’.
We have also recommended buying German assets (equities, especially linked to real estate) on dips for the last few years. This advice also stems from a feedback loop caused by the adoption of the Euro and this recent dip is another suitable opportunity.
At present there doesn't seem to be a reason to change our view of bonds - they will probably rise. It is possible to construct a scenario in which US equities and bonds both go up but this would reverse the current negative correlation between the two. Nonetheless, this now seems likely to us and we will review all the fixed income evidence carefully in the coming days to make sure that this remains the case.