- New Science in old markets -

Major US stock compression, again. Bonds make a bottom extension

The New York stock exchange composite index compressed last week, at a weekly scale. This is the second of these important signals in the last six weeks and it is unlikely that there will be many more - this index has a history of giving early warnings of an impending new move that work relatively quickly. The direction of a new move from a compression are usually unknowable and this is the case here - we cannot tell if this marks the start of a 'blow-off' final ascent or the beginning of a bear market.  The last such signal is also shown on the chart and broke upward, causing us to advise taking long positions, in the 13th February edition and a few days later. That advice 'timed out' late last week so we are sidelined, waiting for a break or some other new signal:

NYSE weekly comp3

A note about compressions to remind you of their features: A compression signal is the opposite of an extension, which reveals that various different parts of the crowd all feel the same, so the existing trend will soon stall. In contrast a compression shows that there is no consensus through any of the time frames, which we have found means that a sharp increase in range is likely - most probably the start of a new trend. Increases in range also mean more violent swings however, so compressions are hard to trade. False breaks and false starts are common, so we try to find other confirming reasons to hold a view that will improve the odds a bit. When a longer-term compression occurs, like this one, it is most important not to take a strong view too early - there will be plenty of time to take advantage of the new trend and there is danger of whipsaw in the early stages until the trend becomes clear.

We have reported evidence from Europe that indicates that the upward price trends in equity markets there will stall at any moment, BUT the Eurozone central bank buying spree has only just started. Our signals work best when there is a freely-traded market in which buyers and sellers are equally well-founded so the introduction of a major new player has a distorting effect. This means we will treat signals that show 'tops' in Eurozone Equities and bonds with scepticism for a while until our methods catch up with this new dynamic over the next few weeks. In the meantime, we have two outstanding short recommendations in non-Eurozone European equity markets - the UK and Norway. More soon on this topic.

Elsewhere, US Bonds fell sharply on Friday after a more gradual decline that started in late January. This has now produced a bottom extension in the futures continuation series that will probably lead to a rally from hereabouts. Obviously the outlook for European bonds is also good because of the substantial amount of central bank buying that starts now but we will try to find a dip to adopt a long position. In the meantime, buy some US bonds or notes here. The signal:

US bond bottom ext