- New Science in old markets -

Trading ranges abound. Top extensions in real estate

We have been seeing a lot of mean-reverting price behaviour in recent weeks in many different asset classes.  This is the same thing as saying that prices are trading in a range of course, but that term can describe many different types of trading environment. Ranges may be wide or narrow, well-defined or erratic and short-term volatility may be high or low. Any one of these conditions can lead to compression signals if it carries on long enough, which means that the existing condition will soon change, probably into a new trend. In the meantime, there is a shortage of trading signals.

US stock indices are in wide ranges with some increased volatility (real volatility that is, not Vix-type implied volatility from the option world). As a note, the shorter-term volatility of the S&P did 'spike' up at the recent late-December lows but has now fallen back again toward more normal levels - we show the 5 week volatility measure here which some may consider too short a period, but it's what we use for the calculation of risk.

S&P vol

This volatility will probably still drop more, no matter what happens to the price, as the present level of daily volatility also remains high at about 1.75% compared to its long-run average of about 1.2%.

Elsewhere, all the grain markets have either just compressed at a weekly scale, or are still within the price range of recent compression signals, reflecting the lack fresh developments in the last six months:

Corn, wht, bns wkly comps

Other commentators have been complaining that this is caused by the US government shutdown which has interrupted the flow of statistical information but this is a profoundly mistaken view. Markets rarely make important moves on news anyway and this sideways activity pre-dates the shutdown by many months.

Compressions mean that pressure is building up and we await the break. Regular readers will know that we have been getting progressively more bullish on the prospect for commodity prices but we are getting no help from grains, which are also compressing at a daily scale. We wait, still with a slight bullish bias.

Copper has also compressed at a weekly scale, despite the recent sharp 25 cent (10%) rally from range lows. The recent sideways movement in the US$ has also led to a weekly compression in the Euro/$ exchange rate:

Copper, $-€ wkly comps

The only other signals of any interest have been some recent top extension in US real-estate sector indices, at a daily scale (see first chart below). We rarely advise trading from sector signals as the rotation of fashion from one sector to another doesn't help much in predicting overall market direction. Real estate sometimes leads the whole market however and these new signals do tend to confirm our view that the S&P should find it harder to go higher from here, as it has reached overhead resistance (see the January 18th edition, chart updated below). The resistance covers the whole span of the ringed blue bar in the second chart below, which extends from 2635 to 2769, so the rally since December 26th has pushed a little over half way into it before (so far) stalling.  That could be enough.

Real est dly ext, S&P wkly comp

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