- New Science in old markets -

Equities still compressing, coffee drops

There were multiple further weekly-scale compressions in equity indices last week, in the US and elsewhere. Here are the US examples, without further adornment:

NYSE, Midcap, Smalcap wkly comps

and France and Germany:

Ger, Fr wkly comps

There have also been multiple weekly-scale compressions in US sector-specific instruments. Here is a selection:

Pharma, Media, banks wkly comps

This repeated occurrence of weekly-scale compressions across a wide range of equity assets is typical of the late stages of a trading range. Despite some breathless journalism describing (US stock) markets as being in a long-lasting bull market, the truth is that stock indices almost everywhere have traded in wide ranges since the beginning of 2018. We identified this at the time it began and have recently warned (on September 30th) that this ranging condition was likely to end soon. There is still no way to predict which direction markets will take as there are arguments both sides.  To summarise:

  • Stocks are expensive from a historic perspective, especially in the US and have been driven to these current high valuations by a frantic 'reach for yield' due to the low returns currently available from bond markets. This will end badly.
  • Stocks are not too expensive as the new central banking regime in which Quantitative Easing and negative interest rates are used to keep economies growing regardless of the need for a recession to cull the weak keeps yields low indefinitely. There is a chance that stock markets will enter a bubble phase in which valuations do become too high even by the standards of this 'new normal' situation.

We currently have an outstanding 'short' recommendation from the September 17th edition which has an open profit. This position would ordinarily be 'timed out' about now but we have advised holding on to it with a stop at break-even because any downward break of these weekly compressions into a bear market would give traders a wonderful 'head start' in the market. This is the only reason for holding on to it and this advice doesn't mean that we have any prior knowledge that a downward break will occur.

Elsewhere, coffee has recompressed and pushed downward:

Coffee recompressed

We recommended 'buying any dip' in the September 11th edition after the first recent compression. What we had in mind was a dip back to the compressed area, such as the one arrowed in blue, which is where we always expect support to be found.

That dip did happen, as usual but two further compressions have since occurred, as shown and the price has dropped through them in the past few days  to its present level. This means that a new downtrend has probably started but, if you bought on that first dip, hold on with a stop below the level of the first compression as it may still act as support. That day's low was 95.30 in December futures. If that doesn't hold, especially at the close of the day, get out.

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