- New Science in old markets -

Stocks compressing, Japan breaks up; commodities stalling

There have been several daily scale compression signals in various stock markets lately. Here are examples from the US and Japan but the UK has also compressed, as has Canada. The Japanese market has been churning sideways since a huge run-up from November last year in anticipation (and later on, the news) of the stimulus package that shocked the world with its scale and now it looks as though a new up-leg is beginning:

The US and UK (not shown) have not broken up from these new compressions and we do not assume that they will necessarily do so – compressions are moments of great uncertainty and we always prefer to ‘wait for the break’. We had been bullish about the prospects for US markets since the most recent bottom extension in Dow futures on the 21st August:

This Dow bottom extension signal is still ‘in date’ but we must now acknowledge that the new Nasdaq compression means that there is doubt. Stay long US stocks but with tighter stops.

Elsewhere there is yet more evidence that the commodity rally has ended/is ending.  Soya meal made another top extension yesterday – in the front month:

This is significant because almost all the recent demand for soya comes from Chinese cattle farming (cows eat soya meal) and this has pushed the market into a fairly constant shortage. Nearby delivery months trade at a premium to later months (a so-called ‘backwardation’) because of this and it usually means an extra ‘squeeze’ on supplies as we enter each delivery month. This top extension in the current soya meal delivery month of September shows that this squeeze is already at its tightest and that prices will not rise from here. If even the tightest grain market cannot rise further, the prospects for the rest are poor. We will look for places to establish shorts, as we have already advised in copper in the August 28th edition, although with a high-risk health warning - see an update above. Copper fell quickly to some support but we suspect this won't hold and more price drops are ahead.

We also want to recommend short-selling in energy markets, as warned last week but have not found an ideal place to do so. Selling ‘at market’ now is clumsy but probably the right thing to do after the Brent crude extensions of last week. Here is an update:

More soon on bonds and currencies.