- New Science in old markets -

More US equity index top extensions, China compresses, wheat drops

There were more top extensions in US equity indices yesterday, this time across a much wider range of instruments than those in the Nasdaq the day before. Here is a selection from the 12 that we saw:

This strengthens our existing view that US equity prices will struggle to go higher from here and that this is likely to be the start of a process of ‘rolling over’ which will eventually lead to lower values. There is a possibility that declines could start immediately, so we have advised starting a campaign of short-selling as of the first Nasdaq signals two days ago.

We are bearish in the medium and longer-term because of weekly and monthly-scale top extensions that we have been reporting to you in recent editions. The struggle between the bearish influence of the generally poor economic outlook and the bullish influence of persistent money-pumping from central banks continues and our analysis tells us that the poor economic outlook will now dominate for a while.

At the risk of boring you with repetition, the markets that have the worst prospects in our general bear view of Europe and America are those of southern Europe. We have often stated why this is the case and it has proved to be true for five years. This group, comprising Spain, Italy and France (leaving out Greece for now as it is hard to trade) will continue to suffer economically from being chained by the same currency to the competitive economies of Northern Europe and they also tend not to attract the extra money that is sloshing around the system due to the actions of many central banks. Just as water flows downhill, that money is ‘pooling’ at the lowest point which is currently Germany and its surrogates and particularly German real estate, which is booming for the first time ever and has yet to form a ‘bubble’. For the foreseeable future we will continue to recommend short-selling equity markets in these Southern European countries whenever we think it is time for a market drop and buying Germany etc whenever it is time for a rally.

Meanwhile, one of the China indices that we follow has just compressed:

This is only a daily-scale signal but the timing is interesting and it may be important. We have detected a significant shift in the mood of international observers of the China scene in recent weeks. This is best illustrated by the comments of Clyde Prestowitz and others re-examining the prospects for China’s economy overtaking that of the US in overall size. Until now, the forecast date has been getting nearer and nearer, so the new proposal that it may not happen at all represents a profound re-think. We do not consider the merits of the arguments here, but merely note that the mood has shifted. This new bearishness may eventually be justified but markets cannot fall easily when such pessimism prevails. These are just the views of a few commentators, who are usually wrong so, if this compression breaks upward, we would buy China – this recommendation has eluded us until now.

Elsewhere, we reported in the May 13th edition that grains had compressed. Wheat prices have now broken downward from that compression, so you should now be short. An update:

More soon,