The 30-year futures contract made a daily-scale top extension yesterday, which is the latest in a long series of these jagged peaks. More importantly, the yields of both 30 and 10-year treasuries also extended – making bottoms not tops, as the yield is the inverse of the price. Yields usually produce more reliable signals as the data is continuous over a long period, unlike futures prices which expire every quarter. These new signals present an opportunity to re-short these instruments, either of which would be suitable. 30-year bonds have more ‘bang for the buck’ but the 10-year seems slightly safer as the yield has made a low point here at almost exactly the same level as the last one in mid October.
There has not been an equivalent new signal in equities. The last one was in Dow futures and was the reason for our buy recommendation in the December 17th edition on which partial profits were later taken and the remainder ‘timed out’. See the first chart below for an update on that signal which is still just about within the limits of its active life and so could be used to re-enter US equity longs. This is a bold and potentially risky step however, so if you do it, don’t risk much. It may be better to buy sector indices in those areas that will benefit most from cheaper oil, such as manufacturing and travel – more on this later.
The sharp financial market moves in recent days appear to be because of developments expected in the Eurozone – the announcement later today that may show that inflation has turned negative and the further expectation that this will prompt some form of QE almost immediately. Among the other effects, this has weakened the Euro against other currencies and it has now extended against the $ – see the second chart below. This is probably the best chance yet to ‘fade’ this move and buy the Euro. Our methods work best when markets move freely and are un-influenced by governments and other single big players. This is obviously not the case here-and-now in currencies and bond markets (or in stocks, for that matter) but the signals are still working. Trust them but keep strict stop-loss discipline.
