We wrote in the April 24th edition that Bonds had fallen away from compressions into new downtrends. Fresh lows for the move were made yesterday and some bottom extensions have now appeared at the shorter end:
This argues that the down trend is now over-extended and that a pause or bounce is due from hereabouts. The recent performance of these three important points on the US treasury curve is revealing. There are some doubts about the likely pace of rate rises in the US as the economy is not growing as fast as was hoped. Rate rises have a direct effect on instruments at the short end (which we think of as up to five years) and an implied effect on longer-term instruments which is why the yield curve doesn’t always move up and down in lock-step.
A slower pace of rate increases should support the five-year more than the 30-year if everything else is equal and yet the five-year has fallen so much in the last week or so that it has now extended. The thirty year has barely managed to make a lower low that the one made in late April, so this is puzzling. The only reason that we can think of is that this was a ‘market capitulation’ and that even the most optimistic holders of shorter-term US paper have now ‘thrown in the towel’. Such moments are good opportunities to buy, so we are inclined to do that. We suspect that the better purchases are in the longer maturities, despite the fact that this extension signal is in one of the shorter ones.
Equity markets have started to falter after the Eurostoxx top extensions reported here in the May 10th edition. We still have the same opinion, which is that most stock markets are and will be range-bound. We have simply seen the top end of these ranges in recent days, rather than some more important event. There have also been some other tops that we did not report as they merely confirmed the Eurostoxx signal. Here they are:
The last chart also shows (the pink arrow) where a top extension occurred in late April in the Dow version of the UK index, as reported in the April 24th edition. We like to remind readers that we occasionally get signals that can mislead and this is an example. We are aware where the traps can occur, so try to point out often that top extensions should be regarded differently from bottom extensions as they:
- Can mark the end of an upmove but there may be some churning as a ‘top’ forms before any drop becomes likely
- Can repeat, and although this happened here, it is rare in mature markets. We sometimes see multiple repetitions in emerging markets and so we are careful how we interpret such signals.
As a result we prefer to use all our coincident signals (top and bottom extensions, compressions and returns to compressions) together with the turns that we publish in AlphaMail every month. When we get a signal on or near a turn day we pay particular attention.
All signals courtesy of software supplied by our friends at Parallax Financial Research www.pfr.com
