Some financial assets have risen since November 2012. Others have not and we have proposed reasons why this should be – the creation of the Euro a mere five years before the worst financial crisis in living memory locked Spain, Italy, Greece and even France into a common currency with countries that are a third more competitive than they are. The equity markets of these unfortunate countries have all dropped (except France, but watch for this happening soon) and this will continue for a long time to come, so we will keep trying to find places to sell them.
The same situation has given Germany and its similar neighbours a fair wind however and we have recommended buying dips in these equity markets as they have occurred. So far so good but this prolonged updraft will have larger drops. Even Germany has made little headway recently despite being both the main beneficiary of the Euro and also the end destination of much of the gigantic amounts of ‘extra’ money created by the world’s central banks and injected into the markets through various programs of bond buying.
This co-ordinated activity has achieved one of its desired effects (pushing bonds higher) but has had poor results in the other - that of creating demand. Low single-digit growth in a few Western economies has been hailed as if it were a triumph but all market folk know that ‘proper’ growth after a recession should be well above 5% in the initial rebound. There is no sign of that, so obviously the grinding, slow ‘rolling recession’ continues. Any other prognosis is wishful thinking and the headwinds seem to be getting stronger. Equity prices don’t follow economic growth over-much but even if the relationship is distant, there is still some connection. The recent faltering of up-trends in the US, Germany, China and now also Japan indicate that ‘money pumping’ isn’t enough to keep the momentum going, in equity markets at least.
We have already seen weekly-scale top extensions in various important equity indices in the US and elsewhere recently (see March 18th edition for details) and have recommended short-selling campaigns in the US and Southern Europe. Weekly-scale extensions like this sometimes recur a few times – here is the Russell 1000 example from 2004:
The effects can last for many months. Longer-term top extensions like these often mark the end of up-moves but do not mean that down-moves begin immediately - a 'top' must sometimes form, as in this example from the Dow in 2011:
Weekly top extensions are a signal to exit longs and begin trading from the short side. Profits may come slowly at first and new highs are possible, as in the second of these two examples above.
Now we have also seen a rash of monthly-scale top extensions. This is a lot more ominous as the effects can last for 18 months or so. The main examples are from the US but we have a couple from elsewhere too:
Perhaps significantly, there are no such signals from Asia. In fact the market that has delivered the most relentless rally is Japan and that is moving higher from a monthly-scale compression:
This implies that there is more of this rally to come, in due course. Malaysia is another that has done well and it is moving up from weekly-scale compressions. There has even been a 'return movement' there in which the market dipped back to re-visit the compressed area, as often happens, before the rally resumed:
All this seems to mean that equity markets in the 'old economies' of the US and Europe are struggling but that Asia is doing better. This is the first time that our signals have confirmed this widely-held view. There is no need for much fresh advice here as these new monthly-scale top extensions merely confirm what we already thought. The only change is that we now think that some profits could be taken on long-standing long positions in Germany, on rallies. We expect to be able to issue further buying recommendations there in due course, as the long-term forces pushing Germany upward are still strong. We wait to re-buy Japan and to buy other Asian markets, including China.