- New Science in old markets -

Stocks broke hard on Friday – more to come?

The US stock market fell hard on Friday, probably because various Fed spokespeople keep suggesting that the upcoming September meeting may well result in a rate rise and the market now has the strong impression that this is a coordinated 'softening up' exercise intended to minimise damage when a rate rise does occur. Bonds fell too and the combination makes us think that there will be more weakness to come in the next days. There were fresh signals in a couple of Dow-related US instruments on Thursday, which 'reset the clock' and so negated the earlier apparent break upward from compressions last week. These two example charts show the story:

sp-and-dow-daily-comps-break

The US note and bond situation is similar - tight ranges that broke in the direction of higher yields/lower prices, so both sides of the US capital markets apparently now feel that rates will most likely rise, and soon:
ten-year-yield-and-30-year-price-comp-brks

The reaction in European equities was far more muted and weakness was quite routine - the Dax even made a fresh compression signal by the end of the day. If however there is to be more selling in the US, it is hard to see that Europe will not also suffer and this Dax compression could then break down and so the snowball could gather speed.  Interestingly, just before this all started, there was an isolated top extension in a Hong Kong index on Friday, that warned of trouble ahead:

dax-comp-hk-top-ext

To put this into perspective, the weakness in US stocks on Friday was severe by recent standards but has only brought prices down toward the level of the weekly-scale compressions that occurred in June. There will be support in the area of these compressions which would have to give way before there could be any chance of serious declines. An example from the Dow:

dow-weekly-comp-update

We sold our long positions in all equities on Friday and adopted a short in S&P futures about halfway down the day's range. We will advise what we plan to do with that new short position as the week goes by.