- New Science in old markets -

Equities drop into bottom extensions IYT worth a look

The most recent weakness in the 2106 equity market drop has produced some more bottom extensions in various parts of the world. These seem to have marked the end of the decline for now and a brisk 4% rally occurred from low to high point in the S&P yesterday, after a greater preceding fall. Charts:

HK, Sing bott exts

S&P400, Valug bott exts

There have also been more bottom extensions in sector-specific instruments in the US: XLB the materials ETF, XOP the Oil and Gas exploration ETF, USO the Oil field ETF, KRE the bank ETF as well as more extensions in the house/home building sector.

IYT the transport ETF also has an extension and this is down 30% from its high point, so must be good value considering the current low cost of transport fuel:

IYT bottom ext

Overall, the downward break of weekly compressions in various equity markets described in several recent editions (see most recently January 19th) gives a high probability of further declines. These new daily-scale bottom extensions warn that rallies are likely in the near term which will give better chances to sell. Such a rally is occurring as I write and the March 2016 S&P is at 1870. There is no way to tell where the correct 'sell level' may be but an educated guess would be toward 1890. It also seems likely that a range will form in most markets while we wait for renewed weakness, so there will be more than one rally followed by another dip and so on.

This means there should be a chance to trade the range a bit but it is probably safer to do this from the short side. There are however some reasons for optimism that  may support better rallies or perhaps just longer-lasting trading ranges. The price of oil and the value of the S&P have been strongly linked for some weeks. This intimate tic-by-tic relationship clearly broke apart yesterday so the further oil price declines that Saudi Arabia obviously wants might start to be seen as the stimulus that they are, as we suggest by buying IYT (if you are a 'value' investor).

Similarly, China's stock market will fall further but this may not have the bearish effect that it has had in the widespread decline so far. The Chinese market usually 'goes its own way' and there are signs that this may resume. When we say that China will decline more, this is because every bubble that ever there was returned to its start point after bursting. This means another 20% decline from here, probably over the next few months. This is largely a domestic tragedy and so the rest of the world's markets could (and should) ignore it - it will have little continued effect on the 'real' economy of China or the wider world.

Finally a note on Gold and Bonds. The 'flight' into Gold has not occurred during this drop in stocks. This probably means that panic is not yet widespread and so it is still waiting to happen. There has been a move into bonds however, even though many shorter-term government instruments have negative yield. Taken together, this is evidence of fear but not panic. Yet.

There are no top extensions in bonds by the way, which would help in picking the eventual bottom of this stock market slide.