Thursday, November 8, 2012

Implications of the Presidential Elections

As mentioned in the last post, last 3.5 years saw doubling of the stock market prices i.e. from 6500 to 13000 (DJIA). Under such circumstances and keeping in mind that humans have a short memory span, it was very difficult to beat the incumbent President in the Presidential Elections. We can also say that Mitt Romney chose the wrong time to participate in the elections. 

Yesterday’s elections were a clear representation of the optimistic social mood. Everyone knows that the last 2 years have not resulted in any productive legislation, but even with such a bad record voters voted to keep the status quo. This voting behavior highlights how people think and how they perceive the stock market as the barometer of the health of the economy. In any case, yesterday's results will have far reaching implications for the entire country.

We all know that during the last 2 years, when House was occupied by the Republicans and Senate was led by the Democrats, we did not see anything constructive in Washington. We only saw political point-scoring and bickering over critical issues like budget. This situation is going to continue over the near future, which means that nothing significant will be done for the economy. Thus, we might soon experience the fiscal cliff, sequestration and/or budget cuts. All of these actions will be detrimental for the economic growth. At the same time, Democrats will push their agenda for the tax hike which has been a contentious subject for Wall Street. In short, status quo is a bad omen for the American economic outlook.

As far as the stock market is concerned, the optimistic social mood was the key driver behind President Obama’s success. However, as we all know that after a sharp decline, markets typically retrace a big chunk of the initial decline. A similar situation happened in the U.S. markets i.e. after the great crash of 2007-2009 market retraced almost 90% of the decline. The only problem is that this rise was subconsciously attributed to the sitting government, whereas in reality the market rally was not a function of actions performed by the President but was a function of time i.e. it was supposed to happen. In any case, people started feeling optimistic about the market and hence voted for the person, under whose tenure the market bounced back.

As mentioned previously, Voting/War is the final manifestation of the social mood (happen towards the end e.g. wars typically happen near the end of the bear market). It will be appropriate in Elliott Wave terms to find out after 2 years that the stock market topped in October 2012 (right before the 2012 Presidential Elections, which were won by the incumbent President and soon after the QE Infinity announcement by the Federal Reserves).

  • Since Elliott Wave analysis measures social mood in terms of the stock market, it is currently suggesting that we are starting a protracted decline phase, given that we do not break above October 5 highs. Detailed Elliott Wave analysis will be presented later. 
  • Please also note that the Global Dow, unlike DJIA, is well below its April 2011 and March 2012 highs. This divergences between US and global markets, is another very dangerous sign for the market in the near future. 
  • Finally, completion of the 8/4 test means that we are about to embark on a prolonged downtrend. 
  • IPM model will help keep you informed of upcoming turn dates, so that one can take advantage of trading opportunities. IPM Model predicted the October top in September and has had an accuracy rate of ~92% over the past 3 years. IPM Model updates are available at subscription

After exhaustive analysis of social mood extremes, future decline potential and market trajectory reasoning, a very interesting conclusion is reached. Details will be provided in the next post. But in short, humans are supernaturally forced to make detrimental decisions, at the most critical junctures of time. And I think we just made one such bad decision (I hope that I am wrong !!) 


  1. Naqvi,

    I've been following you for a couple of years. You have made many correct predictions about the market (both up and down). However when it comes to you predicting MAJOR moves to the downside the model has not been as accurate, ie. Nov 2011, Jul/Aug 2012. With that being said, I know you've made many great calls and nailed the dates exactly. Do you have any idea why your software predicted a downturn at those times, when the market actually went up? I'm hesitent to believe this prediction as I've been burned on the previous two.

  2. Thanks for your observations. It will not be accurate if I say that I do not agree with you. In fact, it is great that you brought up this point because it allows me to show you the evolution of this model over time.

    I will begin by saying that there is no model that is 100% accurate in the stock market analysis world. In fact, some analysis brag about their models if they are only 65% accurate. The reason being that you can always pre-define your risk threshold. Therefore, if the market does not go you way you bail out. For this purpose i use Elliott wave analysis to predefine stop areas, at the same time I take profits at pre-determined levels based on statistical calculations, to lock in majority of the gains and then wait to reenter the trade near the turn date.

    Anyways, like you said IPM model has been very accurate. In fact, i did a historical analysis in order to identify its accuracy and i came up with a probability of accurate call to be around 0.95. Now, out of many calls predicted by the IPM model 2 are in question.

    1- October 2011 bottom. As you might remember the bottom was on October 4, this bottom was the 4th day of the IPM turn window. So the bottom was genuine but we did not take the long trade because we were in a well defined down trend. However, you should also remember that we exited all of our short position near the low and avoided the rally while being short.

    I have always followed the global Dow as a good market proxy to identify bull and bear markets. And it disheartens me to say that since last October, global Dow never came back into the bull territory.

    2- August 2012. I agree that it was stated that we should top on August 12, followed by a sharp decline. Markets did indeed top within the ipm model turn window and then went sideways till early September bottom in the ipm turn window. The only difference was that they did not decline sharply. This is the area where technical analysis and risk management comes into play. If the trend is strong, market might undergo sideways correction only before rallying hard, whereas if trend is week, market could top out. This is what happened in October. IPM model predicted a mid October top in September. However, the trend was very strong till September. Therefore, market went sideways and then made a final high with significant divergences among the averages to mark the October top.

    In short, ipm model equips you with a unique method of identifying the turn points. After that it really depends on your risk appetite, trading strategy and market analysis techniques to define the trading plan around the IPM turn date.

    THanks for being a regular reader of UST



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