- New Science in old markets -

Copper-bottomed*, European stocks make tops, Japan moves up. REITs

Copper futures made two weekly-scale bottom extensions recently and daily-scale versions too at the lows of mid-January. Now that the lows have been re-tested, it is time to try a long position:

Copper bottomed

* We have been waiting years for an opportunity to use that headline.

This has also produced weekly-scale bottom extensions in the mining sector SPDR, which is also worth buying here:

Mining bottom

Elsewhere, the rally in Europe produced more top extensions in equity indices. We have one outstanding short recommendation in Europe: a small position in Spain. We may add to this with more recommendations in due course, but we wait for now. There are two reasons for caution:-

  1. Our methods measure the mood of the trading crowd to see when it is over-heated or cool. When too hot, we take positions against the crowd but this approach works best when there is no big dumb player dominating the market. The new QE announced for Europe is just that - a new big player who will be unaffected by the mood swings in the rest of the crowd
  2. Europe is still split between beneficiaries of the Euro (Germany etc) and victims (the South). The new money coming into the market will not be directed accurately, no matter how hard the ECB tries to aim it. As a result, much of it will end up in Germany where the positive feed back effect of being a large competitive economy within the Eurozone will be magnified and the existing asset boom will probably get more intense. The European indices that have extended are those that we expect to continue to do well - Germany and its closest imitators. We don't want to sell these and don't yet have a reason to sell the Southern equity indices:

European tops

The story is different in the East. Japanese equities have been trading sideways for some weeks, showing that QE doesn't always lead to immediately rising asset values. Now however, there have been some compressions and a break upward. Something similar has just happened in Australia and both can now be bought. Buying Australia might be too similar to buying the Mining SPDR suggested earlier, so Japan might be the better bet here.

Jap and Aus break up

In the US there have been multiple equity index compressions as remarked in our overnight 'AlphaMail'. Here are some examples and we now wait to see what happens next before advising any new position:

US compressions

Lastly, there have been weekly-scale top extensions in a couple of REIT (US real-estate investment trust) indices lately. We will write more on this in later editions but this can be a warning of trouble ahead in the broader market indices in some months' time. In 2007 there was a ten-month lag between REIT top extensions and the big market top:

REIT top