- New Science in old markets -

US stocks make weekly compressions – a new move soon

There were weekly-scale compressions in several US equity indices last week. This comes as no surprise after the sharp drop-and-rebound in the second half of the week, which was the trigger for these new signals. As the 39 second video on the site shows (it's the first one, or click here to see it) as the fluctuations in a market get closer and closer together, then a change of state is approaching. Last week's busy activity marked the point when the ups and downs got close enough to generate these compressions so the next sustained move is now imminent:

Russ2k, Valug, Reit wkly comps

As ever in the case of compressions, we cannot know in advance which way they will break. We have been positioned on the short side in recent days but the probability of success has just dropped to 50:50 so we will now tighten our protective stops so that an upward break of these compressions will get us out. The reasons for staying short are:

  • There have been weekly-scale top extensions (as reported here) in some other US indices that are still just about 'in date' and which will inhibit rallies.
  • The rally in US stocks since the Presidential election has some of the characteristics of a 'last gasp'. It has been explained as the realisation that a business-friendly administration would cut taxes, reduce regulation and boost infrastructure spending. Of course the real reason for the rally was that the consensus view of equities in November was bearish and so there was a six-week scramble to 'get long'. This panicky rush needed some rationalisation to explain why it was sensible to buy stocks after a bull market that had already lasted 8 years and seen values almost triple and so we should regard these three given reasons with scepticism  - even though some investors might believe them.  The administration has since been losing credibility at an astonishing rate and now there are doubts about the tax cuts and the infrastructure spending. This means that equity prices are vulnerable to a big dip (at least). We rarely pay attention to politics in our analysis, but this is reminiscent of the dawning realisation in 2008 that the Brown government in the UK was incompetent that provided the first wave of selling in what became a major crisis.

A note of caution: These compressions are in 'secondary' indices. We may yet see a little more 'churning' sideways action and maybe some weekly compressions in the 'major' indices (S&P, Dow, Nasdaq) before the move eventually starts. This kind of market behaviour is among the most dangerous kind as mood swings proliferate and there are traps everywhere for the unprepared. Be careful - don't chase moves.

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