Tomorrow we expect the first of the series of large equity market turns that were noted in the April 12th edition. There was an error that day, naming the two turn days as Wednesday and Thursday of this week – it should have read Wednesday and Friday. These two turns may of course mark the same event but there is a good possibility that they may be separate. If so, watch out for sharply increased two-way volatility later in the week.
A turn can mark a high or low point, depending on the prior trend. At the moment, most equity markets around the world have been rising and so tomorrow’s turn will most probably mark a high point. There is also a Dow-series turn due today (these usually mark the longer-term turns) that adds interest to the situation – that high point can happen at any time from today. As I write, US equity index and German DAX futures contacts are already making new highs, so the scene is set.
To recommend a short position we like to see a combination of an extension signal that comes within a day or two of the relevant turn. As yet, we only have a scattering of recent daily-scale top extensions in Asia - Singapore, as reported and now Taiwan and Malaysia, shown here:
It may be that these signals are enough to justify a short recommendation in these three Asian markets, but we are reluctant to advise it unless for a very quick trade. See below for reasons.
Some measures of the Nasdaq are also ‘set up’ for a top extension but we don’t yet have a signal. We will report as soon as we do but in the meantime we are on high alert, looking for an opportunity to sell short. As ever our preferred candidates will be the equity markets of Southern Europe, for reasons often given. Interestingly the German finance minister at the time of the Euro launch has now said what we have long believed - that Southern Europe is doomed to poverty by being harnessed in a single currency with Germany. This won’t go away as the dominant market influence in Europe, so our strategy continues unchanged – when it is time to buy we recommend Germany, when it is time to sell we recommend Spain, Italy Greece and more recently also France. The US may also present us with an opportunity to sell - if only for a decent dip.
On the global front, the fight that has been going on between the bear influence of poor or indifferent growth prospects in the US and Europe (maybe now Asia too?) and the bull influence of lots of cheap money continues. The latest recruit to the cheap money camp is Japan and we can probably attribute recent equity markets’ strength to the anticipation of some leakage from that enormous new surge of cash. As we have already reported there are weekly and monthly-scale top extensions in many equity markets in the US, Europe (and some in Asia) so we do not expect significant further strength in most places despite this new factor. Rallies remain a constant possibility however, so we will continue to try and ‘time’ our ‘sell short’ recommendations using this well-tried combination of turns and extensions/compressions. We are reluctant to recommend Asian shorts for now (except in the very short term) simply because the most likely recipients of liquidity leaking out of the new Japanese money creation effort will be Japan’s neighbours. We prefer not to fight that, yet.