Yesterday’s (Tuesday 30th November ’21) further drop in stock markets took index prices to slight new lows for the move, after a good one-day bounce from the sharp weakness on Friday. This has produced bottom extensions for the first time in this bout of weakness, in the Dax and its close cousin the Eurostoxx50:
US indices, which we advised buying after Friday’s weakness also dropped back yesterday. The signal that caused us to issue that advice came from the Dow, as it had dropped to the level of an old compression, where there is always support. As we said, this is actually our preferred moment to enter a trade, rather than on the initial break of the compression, because the risk of a sharp reaction has diminished. This new weakness pushed the Dow a little further into that support, but it ‘held’ – see first chart below
The mid-cap index that has been a source of so many signals in recent quarters was quite a bit weaker than the other main US indices yesterday and that extended drop took it to the level of a similar old compression where it found support in the usual way – see second chart below:
There has been a scatter of other bottom extensions from elsewhere too. Here are Mexico, Singapore and Malaysia, so it seems likely that a general ‘relief rally’ in stocks is in process. Buy, and keep buying dips:
We also advised selling the rally in bonds that (as usual) accompanied the drop in stocks. This was because of separate ‘bond-specific’ signals, not just because we thought they would go in opposite directions. We showed that there would be resistance in the T-Bond contract from an older compression. This had already turned the market lower after a bounce in early November and it looked likely that it would do so again. So far it has – see first chart below. Now there is a new compression in the 5-year note contract that will decide what happen next – see second chart below. If it breaks downwards then the bear market that we think began in August can continue. If it doesn’t, then fixed-interest instruments all along the curve will probably continue to range-trade for a bit longer.
Lastly, a general observation. When some sudden event occurs like this new Covid worry and markets react sharply, correlations tend to break down. There is no reason for say, commodity prices to march in lock-step with each other or with stocks, but that has been the tendency that has crept in, as often happens. In the ‘out-run’ period from the initial flurry of worry it is useful to see what divergences may occur. Now, for example the energy complex has dipped along with equities but failed to rally with yesterday’s bounce in stocks. That is a strong clue that the back of the bull run in energy has been broken. We reported weekly-scale top extensions in the October 26th edition, so this view fits with that signal.
All signals generated by software produced by our friends at Parallax Financial Research www.pfr.com
