- New Science in old markets -

Equity market update and watch out for bonds

The generally compressed market conditions reported in a couple of recent editions continue. A major French index, the German second-tier MDax and a key Korean index have all now compressed or re-compressed at a weekly scale, meaning that markets are still range-bound, and you should act accordingly:

France, MDAX, Korea wkly comps

As we wrote in the April 4th edition (when stock markets were at the bottom of their ranges) this means buying dips and staying long until a reasonable profit can be taken and then selling short toward the top end of these ranges. We hope to be able to issue firm recommendations at the various 'best' points to do this as we have already done (so far) in this new wide-ranging environment. In Europe at least, prices are now more-or less at the top end of their ranges, so don't overstay your welcome on the long side.

Government Bond markets are still quite quiet but that may be about to change. As we also wrote in that same April 4th edition Bunds had made some daily-scale top extensions, which has now stalled the rally. The first two charts below show an update to that April 4th Bund chart and a monthly chart of the same instrument. It has traded in a really tight range for 22 months so it seems likely that prices will drop back down to the bottom end  before anything else can happen:

Bunds x2 USweelly yield update

That might then lead to the widely anticipated bear market in government bonds, as shown in the third chart above. This weekly view of US 30-year yields (the reciprocal of a price chart) shows the typical aftermath of a compression signal: 30-year yields made a number of compressions late last year and earlier in 2018, breaking upward (i.e. prices went down) in February. Now, yields are falling back toward the level of those compressions, as is normal in the circumstances - compressions are frequently re-visited after a break - but the next thing to happen is usually a bigger move in the original direction i.e yields go up, bonds go down. This could be the start of something bigger as super-accomodative monetary policy is progressively unwound and pain is felt among bond holders.

It may also mean that the start of the next 'leg' down in stocks is close at hand - if every asset has been artificially inflated in value by central bank generosity (as we are constantly told) then it makes sense that the values of all of them will also eventually fall - probably all at once.

The consequences of this 'unwinding' has been much discussed in prior years but talk of it seems to have diminished lately, despite the Fed's several rate rises and the imminent end to the ECB's extraordinary measures. This silence seems odd, but then again, most people are caught looking the wrong way at important junctures...

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