- New Science in old markets -

Turn day – short selling time in equities

Today is a turn day in equity markets.  We have not published a schedule of turns lately as there are none of any size that we can identify in these recent weeks except this solitary example. The component parts of the turn cluster due today mostly come from Europe, with a sprinkling from the US and Asia but it does contain a Dow turn. These turns stem from our analysis of the Dow Jones Industrials average since the date of first publication over a hundred years ago and it tends to pick up the larger-scale highs and lows. This Dow turn is also not very large, but when put together with the others, the cluster might aggregate into a significant event.

The prior trend is all-important when evaluating a turn signal. Uptrends result in high points at turns, whereas downtrends lead to lows. The prior trend in almost all the markets that we follow has been upward lately, so this means we are looking for a high point today or very soon after today.

We should mention ‘swerves’ although they are rare. In these, a market will be trending toward a turn day and so we think that we can see whether it is likely to mark a high or low point. A day or so before the turn arrives, the price abruptly changes trend and swerves in the opposite direction into the turn day – an expected high can then become a low or a low point that looked certain becomes a high instead. Swerves usually only happen in strong trends and can give fresh energy to that trend – they mark a brief reaction within the trend in other words followed by its immediate resumption. Although they occur only about 10% of the time, swerves can be disconcerting, which is why we always warn of the possibility that they can happen.

In the present case, many of the markets that contribute turns to today’s cluster are making new  highs for the current rally today, which effectively rules out a swerve. Maybe next time…

Accordingly, we advise using these current slight new rally highs to establish short positions in our usual favourite European candidates – Spain, Italy and France. Greece and Portugal are also on our list but are much harder to sell short.

US equity markets can also be sold here, as the longer-term picture still looks cloudy, so this aligns our short-term view with our longer-term opinion. We will review the holding period of these short positions as time goes by – at the moment we expect these to be medium-term, meaning up to four months. That can change quickly if fresh signals arrive, so we will advise.

There are some turns coming up in March, so we will publish a schedule soon.