- New Science in old markets -

Top extensions in European stock indices

There were more top extensions in European equity indices yesterday. Spain extended again, as did Greece for the first time and, perhaps most significantly, the German MDAX index. This comprises the 50 biggest companies not in the main DAX index and so is the ‘second tier’ and it has risen more than the main DAX in the recent rally. These extensions indicate that the rally is on shaky ground and we are looking for places to establish further shorts. We prefer to look for combinations of extensions with turn signals to recommend new positions and the next upcoming turn is not until the week of August 12th but the most recent turn was only a few days ago, on Tuesday/Wednesday this week the 30th/31st. It is just possible that this turn has come late and that these extensions coincide with it but we would like to see some evidence that weakness has begun before recommending more sales hereabouts. Charts:

We have been writing for several years that we always prefer to buy Germany whenever it is appropriate to buy anything in Europe and to sell Spain, Italy, Greece and more recently France whenever we get sell signals - realising early on that Europe is not one economic area. The single currency has forced divergent behaviour on its members (not the convergence that was hoped) and this has been reflected in a gradual uptrend in German assets and the opposite in these Mediterranean countries. In the most recent rally in stocks, Spain has been particularly strong, based on signs that the economy has made some steps toward improvement and so a less uncompetitive position compared to the Northern countries. These steps are real but we still don't think that the disparity between Germany and Spain (and Italy, France, Greece, Portugal etc.) can be reduced much by the measures available. The forces pushing Germany up and these others down is constant (as we have written often here) and the tendency is for the gap to widen, not close. As the Red Queen remarked in Lewis Carroll's 'Through the looking glass': "Now here, you see, it takes all the running you can do to keep in the same place".

That is the fate of the unfortunate citzens of these unlucky countries.

RE