- New Science in old markets -

Dollar extends, Energy too. Stocks update

The US$ has been weak all year and the decline in the last three weeks has been steep. We have now seen bottom extensions in the $index and top extensions in the Euro against the $, so the decline should pause or reverse hereabouts. The Swiss franc has also just weakened quite sharply and this too has now made an extension - shown in the last of these three charts as a top extension in the Euro/Swiss rate. All these are weekly scale signals which means that the market may not turn (or pause) immediately but when this move does end within a week or so, the signals will last for three or four months. It is worth looking for some currencies to sell against the $ for a $ rebound:

$-€, $ index Swiss-€ wkly exts

The main energy markets have rallied since a peak of bearish sentiment in late June and now we have the first top extension signal - in Heating oil, at a daily scale.  This serves to remind us that the energy complex is stuck in a broad range and that prices are now  at the upper end of it. This view is reinforced by a new weekly-scale compression signal in WTI crude that may not break for a while - compressions are common in ranges.

Heating oil dly top, Crude wkly comp

This means that you should sell any long positions that you may have from the June 21st edition and look for a place to reverse into shorts. In the July 19th edition we pointed out that some weekly-scale compressions in Rbob and Natural Gas were poised to break upwards but these new signals supersede that advice.

Equity markets have churned in the last week but we have no new signals to report. Our  view has been cautiously bullish, starting with some bottom extensions in Europe and the end of June and continuing with some compressions that formed in the US, Japan and Europe that seemed to be breaking higher. All that has happened lately is more sideways activity except for the Dow which has pushed onward to new highs, dragging the S&P with it and some weakness in Germany that may reflect the tensions caused by the excessive amounts of stimulus caused by being the most economically competitive nation in an otherwise sclerotic EU. This will cause major problems in the future as we have written many times but we don't see that those problems are yet acute.

This differing behaviour across mature markets is also reflected within the US where there is some old-fashioned 'Dow theory' divergence going on. The Dow itself has risen, ignoring lurching drops in the Nasdaq last week yet the Transport index has fallen away from a failed attempt at a new high while the real estate sector is churning around 10% below the highs (and continuing to compress):

US weekly divergence

We do not specialise in this kind of analysis but nonetheless think that this is a warning sign. If the rally in selected sectors of the US market continues (as seems likely) then this divergence warns that the market is entering the final stage of the bull market that started in 2009. There is still the possibility of a 'blow-off' final ascent, but as we have written here before, this is unlikely to affect all the market - only parts of it, as also happened in the 1999/2000 bubble. In that case the beneficiary (and then the casualty) was the Nasdaq, which doubled in the last stages of the 'dot-com' mania, as we summarised in the January 10th edition. Maybe this time the Nasdaq will do it again, but the Dow is the current leader so perhaps large-cap stocks are about to become terminally fashionable...

 

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