- New Science in old markets -

European Bonds make bottom extensions, maybe Gold too

The bottom extensions that we reported in US T-bonds and notes last week have continued to occur as prices drop and have now been joined by the first such signals from Europe. So far we have seen bottom extensions only in Italian BTPs and French OATs but the other main markets are also close to generating signals:

btp-oat-10-yr-bott-ext

The signals shown here as pink tips on the bars concerned are from Friday's prices - the extra drop today has not yet produced further extensions as the session is still open. We normally generate signals when the day (or week or month) is complete but it is highly likely that the further weakness already seen today will result in yet more extensions.

As a note, last week we advised waiting to buy bonds of any kind until there is some sign of reversal or stability in this drop. This is not merely prudence on our part but reflects the fact that our methods work best when markets are unhindered by interference - free markets in other words. That has not been the case in bond markets since the start of QE after the financial crisis - central banks have been relentless buyers and the normal ebb-and-flow of buyers and sellers has been interrupted by the presence of these dominant players. Now there is talk of the 'bond bubble' bursting, so the liquidation that we have seen so far is theoretically just the beginning of a prolonged slide. We don't think so, as the central banks are unlikely to become sellers into this weakness. If they did it would rapidly become a rout which would carry all other assets down too but there seems to be agreement and discipline among the central banks; they are more likely to increase the pace of their purchases than become sellers. Nonetheless, fear abounds in bond markets so we have held back, awaiting more signals. These new additions from Europe make us more inclined to start buying bonds but still we wait a bit before committing.

In the meantime, even though we usually don't publish them, we do watch for intra-period signals and gold futures are trying to make a bottom extension today:gold-bottom-ext2

If this signal is still in place near the close, buy some gold (or platinum, as we also suggested in early October, at the last signal). We will advise if the signal disappears, so if you do not hear from us later today, assume the advice to buy precious metals is 'live'.

We break our usual habits to show you this developing signal because gold has become a sensitive indicator for market mood. It is always supposed to possess this attribute but is often quite inert and unresponsive. Now however the mood is feverish and subject to quite extreme swings in short periods and gold has moved accordingly. If it is 'bottoming' here, there are repercussions for other markets, so it is worth paying attention, even to signals that are only potential.

Stocks are showing some signs of over-extension (see the last edition for more) and dips are possible at any time. We don't think that any stock market drop would be as large as the post-Trump sell-off but a 2-3% dip could still be unsettling. Don't chase market here.

More soon.

All signals courtesy of software supplied by our friends at Parallax Financial Research www.pfr.com