Now that the reduction in the Federal Reserve buying of US Treasury paper (the ‘taper’) has begun, what next? The markets initial response to this much-anticipated event was a short-covering squeeze that revealed some bear sentiment had built up, and we had noted that some pressure was building in various financial assets in the December 18th edition. Compressions in US debt instruments have broken down, as they have in Bunds, so you should be short of both. If you missed the break, try to get short soon:
Equities shot up everywhere but we advised taking quick profits in the only European long position we advised - in the DAX or MDAX in Germany.
US stocks pushed above compressions, which usually indicates the start of a new up-move, but there have been weekly-scale top extensions in the recent past so we do not advise taking long positions here.
We suspect that this is the ‘one more rally’ phase of the present market rise and there is no way to tell if it will keep going a while longer or stall immediately. We watch from the side lines for now, looking for either a daily-scale top extension (unlikely, unless there is more strength right now) or for more compressions to form which then break down. If prices just start falling, the signal to get short will be a downward break of those compressions that we reported on the 18th- here is an update:
In Europe the situation is different. There, Germany has had a very sharp rally that we think will stall hereabouts, for the same reason that we doubt US equities – a recent weekly-scale top extension that will inhibit rallies for several months. See yesterday’s edition for the chart. The Southern European countries that have been punished by Euro membership just as much as Germany has benefitted are weaker. They too have rallied, but not as much and we are looking for opportunities to re-establish shorts. It may be that they have already ‘rallied enough’ to warrant selling again but there are some obvious levels to watch for resistance – these come from old compressions: