- New Science in old markets -

Turn day in equities, bond update and gold comment.

We are expecting a turn today in US and some other (principally Asian) equities. We have now seen what Asia did today, so can draw some preliminary conclusions: Turns can mainly mark highs or lows and the prior trend determines which – uptrends lead to highs, downtrends lead to lows. In the present case the evidence from Asia etc. is mixed but slightly favours a high point, as shown here:

The evidence from the US is clearer as all indices have risen into the turn day, which makes a high point probable – here is the OEX as an example:

The compression shown here is also an example - there are others in similar places in other indices. Not all look as bearish as this one however, as a few are now under the market, so will provide support. To conclude: the evidence is a little mixed but the balance of probabilities indicates a good chance that today’s turn will mark a high point, from which prices will decline. Helpfully, US index futures prices have already made slight new highs for the current up-move this morning as I write. This 'new high on the turn day' is a small extra bearish sign that will be magnified if decent weakness occurs later on today. We now advise selling short. The choice of market is difficult as our favourite candidates are all in Europe, where no turns were due. Prices will no doubt fall in many places as and when some weakness starts in US equities and we still favour selling the weaker markets (mostly in Europe) over the stronger (mostly the US). Perhaps the best short-sale candidate is now France, where the market has held up well despite worsening conditions. It has probably more room to fall.

Bond and note markets in the US fell sharply on Friday after more evidence of modest economic growth. It has been nine days since the bottom extensions (on the 24th June) in those markets led to a rally, and this latest drop has taken prices to new lows – by over a point in the 30 year, three quarters of a point in the 10 year and a few tics in the 5 year. Nine days may be all the time that these extension signals have – the median life is seventeen days but there is variance around this number. If you did not yet ‘stop out’ of long positions we advise placing stops very close under Friday’s lows. The extensions on the 24th probably did end the steep part of the drop but prices may still ‘edge’ lower, so close protective stops are appropriate:

We do not see a case for short-selling, mostly because another bottom extension signal that coincided with a reversal in Eurobunds is still holding. These German government bonds dipped on Friday, following the US, but the drop was modest so the uptrend is still holding. Buy this dip, if you are bold and wait for fresh signals in the US.

Gold also dropped on Friday, but the signals that made us recommend purchases are at a weekly scale. This argues that Gold will not fall (and so will probably rise, after such bad press) for three months, so keeping buying dips.