- New Science in old markets -

US and German equities extend, Club Med compresses & drops, Yen extends

There were monthly-scale top extensions in US indices last week:

Also weekly-scale top signals in both the US and Germany:

US and German indices, together with Japan, have been the strongest of the major markets in the last few weeks, but Japan has only just started a new ‘leg’ up in the bull market that we think is in progress there, so we do not expect an extension signal there any time soon.

Germany has been the main beneficiary of the creation of the Euro, as we have written often and the MDax has risen by 350% since the lows of 2009 compared with a more modest 150% gain for the Dax itself. New highs have become a routine expectation and we have consistently warned against short-selling German indices or those of closely-related Northern European economies. We have concentrated our bear focus on the indices of the southern European countries around the Mediterranean Sea – mostly Spain (up only 46% from the lows) and Italy (up 50%) but also including France in recent months. France is 84% up from the lows of 2009 but we think it particularly vulnerable.

This advice is still current and these new extensions mean it is now reasonable to expect that Germany will stop rising for a while and dip, so the indices of the weaker economies should fall. They have already done so to some extent but there have now been more compression signals that are a pre-requisite for decent new trends to begin - in this case, declines, as soon as these compressions have broken down - Italy has already done so, France probably has too:

Elsewhere, the Yen has been weak. This is a direct consequence of the massive 3-pronged stimulus package currently being deployed by the Japanese authorities and is a desired result, even though they have been too discreet to say so - it is the hidden ‘4th prong’. Just because the Japanese wish for it doesn’t mean that it will continue to happen as the forces that made the Yen uncomfortably strong in the first place are still at work. Now we have daily-scale extensions in all the major pairs involving the Yen (two are shown here):

...and it is worth trying a contrarian trade by buying it, just for a ‘trade’. The best pair to choose is probably the $/Yen as the weakening effect on the $ of continued QE will offset the BOJ’s role in weakening the Yen, somewhat.

More soon,

RE