Following our warning of an imminent top in stocks in the last edition, there were similar but longer-term signals at the end of last week. Both main Nasdaq indices made weekly-scale top extensions, as did the S&P500. The reason is obvious, as speculative excess has been surging but it has been principally concentrated in the latest crop of ‘tech stock’ fashionable darlings, most of which are listed on the Nasdaq exchange. This has dragged the S&P 500 higher too but not the important mid-cap section of the US Stock market, as show in the last chart. The midcap index shown here has just about reached an old compression, which is where we would expect to find resistance, as usual:
Consequently, although it is too risky to sell the Nasdaq short (bubbles can keep inflating) we would sell all US equity longs and adopt a short in S&P400 futures, right now. The coincidence of a top extension with a turn day (today- see calendar in the front page) always makes us suggest a short, which a top extension alone usually does not, as described in the user guide. Having a ‘weak straggler’ to pick off, as is now the case with the midcap makes the decision easy.
Something similar is happening in parts of the far-East. Here, a Korean index that we follow has made weekly-scale top extensions, while a related Hong Kong index has just rallied back to the level of an old compression. Sell Hong Kong short:
Elsewhere, grains have been firm and have now made a series of top extensions. Sell all longs but wait before starting to sell short:
All signals courtesy of software supplied by our friends at Parallax Financial Research www.pfr.com
