- New Science in old markets -

Many compressions and a top in Italian bonds

There have been some fresh daily-scale compressions in all asset classes. This is not surprising as prices have been churning sideways in many markets and these compressions show that new trends are about to start that will last a few weeks – typically for 17 trading days but with considerable variation around this figure.

The DAX is the most interesting of these signals as it sets the tone for so much of Europe:

As usual, if it breaks upward we will advise fresh long positions in the DAX itself as we continue to see that the Eurozone makes the flow of money toward Germany inevitable.  If it breaks down we will advise selling the usual candidates in the South of Europe: Spain, France , Italy etc. as the same logic continues to deprive them of money – see our argument in many prior editions and the Berlin, Brixton and Barcelona piece on our website for a flippant view.

Five year note yields, yen futures, Brent crude and copper have also all compressed. These are all moving to their own individual dynamics of course but it is interesting that they should all signal imminent new moves at the same time. As usual, wait for the breaks and follow them. At the moment (part-way through the session) the apparent directions for these breaks are: Note yields up (meaning prices down) Yen down; Crude oil no break yet and a possible break up in copper. These must be confirmed by the closing prices of the markets - we have seen many intra-day breaks that were false.

There is always some danger of false breaks, even if these markets do close 'through' these compressions, so the appropriate tactic may be to let the break happen and then stalk the market for a week or so. If there is a move back to the compressed area, take a position in the direction of the original break – if downwards, sell short and vice versa for buying longs on an upward break. This tendency for markets to re-visit compressed areas before continuing a movement is well established and is described in the first text box on page 7 in our user guide. Science calls this the ‘strange attractor’ effect and it is widespread.

One more piece of evidence from fixed-income markets is that the BTP (Italian government bond) future has just made a top extension:

This has become a fashionable asset lately as the unthinking see it as cheap compared to German bonds without pondering why that might be. If bonds are to drop then it is reasonable for them all to do so together, so there may be a chance to sell short a variety of fixed-income markets here. Wait for that break though, but it may be happening right here...