- New Science in old markets -

Equity market update for US and Europe

US equity indices fell away from the Nasdaq compression that we have been discussing for over a week, continuing the sporadic weakness that started from the 14th September top extensions. This has been hard to trade because prices initially seemed to be moving up from this signal. This is typical range-trading behaviour and it will probably continue for some more time, as further commented below.

At the same time there had been other compressions in Europe, from which the French market initially also moved down. Now there have been yet more European compressions and so the picture there is less clear than in the US. If you are short of any of these indices, stay short for now and use these new compressions to place reasonably tight protective stops – not too tight, as more compressions are quite possible in this continued range.

Shorts in equity markets may be held with even greater confidence if they push down from here – compressions are where trends begin.

In the longer-term equity prices are still stuck in the range that has existed since June. The best measure of this is the Dow transport index which has made weekly-scale compressions from time to time since then. We noted that there had been a possible break downward from this compressed condition in the Oct 1st edition but warned that more weakness would be needed for a ‘clear’ break.  Prices did not drop any more after that and are now back into the compressed area, so we continue to keep our stock market advice short-term in nature. There will be a break eventually of course and it may be that we will ‘convert’ our short-term advice into longer-term advice at that moment. There is no point in trying to guess which way that break will be – compressions show that markets are balanced on a knife edge – but we still have a slight preference for a downward move due to the several longer-term sector-index top extensions in the US that we have reported.

As also written on October 1st there are no turns due in equities until near the end of the month, so there is no nearby help from that analysis technique – please continue to be patient while we wait for the larger-scale break.

It is different in Southern Europe. From time to time we remind you that we have a long-term preference for the short-side of Italian and Spanish stock markets.  This does not mean blindly selling them at any price and we recommended covering all shorts at the lows of July, only to resume our bear view once some top extensions had occurred near the rally highs in September. The reason for our continued overall bearishness is the feedback loop that we identified in all Southern European economies with the advent of the Euro, once the illusory prosperity caused by the debt bubble had burst. We will not repeat the argument here – a version of it is on our website as ‘Berlin, Brixton and Barcelona’ – except to say that the market finds it impossible to discount the disadvantage for uncompetitive economies of being tied to more competitive rivals in a single currency. This observation is now commonplace but we were the first to point it out and few others have noticed that the effect is on-going.  This more time passes, the worse things will get and this is hard to discount until there is some kind of ‘selling climax’ as we saw in Greece, where we no longer recommend short-selling. Spain and Italy are still trading as if there was some hope (there isn’t) and the Spanish equity market bounced all the way back up from those July lows  to an old weekly-scale compression, shown here:

This will continue to provide a barrier to further strength. The risks of 'selling against’ this barrier are quite low and so we continue to advise selling any decent rally.

More soon,