- New Science in old markets -

Equities – compressions form but have not (quite) yet broken down

The drop in equity markets yesterday after the minutes of a recent Federal reserve meeting confirmed that some tightening is happening (really?) has set markets up for a possible further fall. We have been negative on US markets in particular for some weeks, with the exception of the Nasdaq. Our advice has been to sell the S&P and Dow on rallies while buying the Nasdaq on dips. The S&P made its rally high over a month ago, while the Nasdaq made a new high yesterday. We are changing that advice now.

There have been compressions in several US indices in the past 48 hours. Some of these broke downward yesterday and so a downtrend may have already begun. This is not yet clear however as the story in these pictures reveals:

US & FTSE daily comps

It is not enough for one or two minor index compressions to break downward for a bear move to develop - this is a tightly range-bound environment in which compressions come and go. We would normally expect a weekly-scale compression to form and break before we can tell which way the next move will be but these are just the daily-scale version.

Nonetheless, there has been that initial break down in the Russell 2000 and so we are now abandoning our 'buy Nasdaq dips' advice. If you are short the S&P or Dow (as we are) then stay short but be prepared to dive out if these multiple compressions eventually break upward.

If there is a down-move in progress, it will probably continue quickly so we advise particular vigilance over the next few days.

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