Saturday, February 16, 2013

Market Structure: Then and Now

Over the last 3 weeks market has gone net sideways. Some have gone up, while others have gone down. As chatter for correction grew louder, market managed to disappoint many participants by going sideways. Most interesting observation is that market managed to stay elevated in the face of Sequestration uncertainty.  Sequestration are the automatic spending cuts scheduled to take effect on March 1, 2012, if Congress fails to take any action. At this point in time with Congress not willing to compromise on tax increases and/or entitlement cuts, Sequestration seems very likely. This will be a big blow to the economy.

At the same time, all of us working individuals felt the impact of payroll tax increase in January. However, its real impact is becoming apparent as retail stores are showing worsening sales. For example, Wal-Mart's numbers for February are the worst in ~7 years. If Wal-Mart is doing bad, others must be worse. This could result in reduced GDP for Q1 2013.

If one combines this spending reduction with potential Sequestration cuts and the associated job losses, it could be the perfect recipe for a negative GDP quarter. Since Q4-2012 was also negative, another negative quarter will put USA back into recession.

After laying out a very possible gloomy scenario, lets review what market trajectory was predicted in the IPM Model Report and what really happened, in face of such uncertainty.

Above chart is an excerpt of the IPM Model library sent to subscribers on February 1, 2013. At that time, UST expected that the market will go sideways to up before bottoming out at the next IPM turn date. This observation was also mentioned on the blog on January 29, 2013:
"In other words, market will continue to go sideways/down till the next IPM Turn window"

Since IPM Model Top Date of Jan 28, 2013, US/Global markets' performance is shown below:

Jan 28 High
Feb 15 Low
Europe ETF

In short, pretty much all the markets have gone down/sideways after topping on January 28, 2013. It was the same time when most of UST Subscribers exited the market based on the IPM Model top date. 

As of today, US markets are on the verge of a significant decline. It can take place at any time. But we must keep in mind that IPM Model turn window is also fast approaching, so the decline might be short but sharp. After this decline, we could see another rally in the global markets. For this rally, emerging markets will be best positioned as they have seen significant correction since January. Whereas US markets might not rally that sharply because of excessive optimism and lack of deeper correction.

US Treasury bonds are also setting up for a sharp short-term rally, if they can hold above recent lows. A rally in the T-Bonds will put downward pressure on the US indices for a deeper correction.

To summarize, it feels very good to be out of a choppy market while others are getting chopped up in the daily gyrations and to get ready to buy back near the upcoming IPM Model Bottom date. I would like to Thank God for this blessing

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