Wednesday, June 26, 2013

Taking Market Decline into Perspective

Two months ago no one was talking about emerging markets and what their implication was about a potential global credit crunch. In fact, “Dr. Doom” Nouriel Roubini came on TV in early June and suggested that stock market will continue its ascent for next 2 years. This happened within the IPM Model Turn Window on a weekly time-frame. Witnessing a perma-Bear turning bullish within the IPM Model turn window was not only a unique experience and a great contrarian indicator; it proved that, by the grace of God, IPM Model commands merit. (P.S. Market again bottomed within the IPM Model Turn widnow, sent to subscribers over the weekend)

Although Nouriel Roubini’s bullish embracement was a good support for IPM Model’s Top prediction, it was not the only reason for concern. From mid-May to early June, several reasons were highlighted on this blog, which hinted towards upcoming issues with the global equity markets. UST’s Market Matrix analysis suggested that markets were heading towards a big decline.

After 3-4 weeks of sharp decline in the global stocks, financial media has now turned bearish. Media is now highlighting the same reasons for the decline, which Understand, Survive and Thrive presented when U.S. indices were hitting all-time highs. For example, China potential credit crisis is destabilizing world markets. But I always ask: “What’s the value of giving reasons after the fact?”

At this point, I would like to highlight that the upcoming crisis (if materializes) will be different than 2008’s mini-depression. Unlike 2008 when U.S. Bond prices rose in the midst of the credit crisis as a form of safety trade, this time U.S. Bonds have started collapsing. Decline in bond prices are a clear indication that investors have started to doubt the viability and eligibility of global debt servicing commitments by U.S. and developed countries. Although there are other reasons behind Bond price decline, it appears as if Bonds will not be a safe-haven to weather the upcoming storm.

According to classical economics, in a deflationary crisis everything goes down. Nothing is secure. No one believes the stock market and the bond market, because people are scared about the prospect losing money. Since investors are not sure if their investments will be repaid, they stop investing in bonds and stocks. At the same time, commodities decline due to large-scale liquidation.

As for today’s market, real drivers behind recent decline are the credit issues being faced by the emerging markets and the bonds market decline. This decline could last longer than what people are expecting. Therefore, one should be careful about long-term investment decisions.

In the event, one should realize that no market (bonds, stocks or commodities) goes straight down. There are rallies on the way down. Bear market rallies are sharp and could even result in 5-25% gains over a short period of time. We might be at such a juncture right now. In the next update, technical reasoning will be provided for the upcoming market rally.

Please note that this reasoning goes hand in hand with the IPM Model. Subscribers already know the IPM Model Turn window (next 2), and the possible trajectory market should take over the next few weeks based on the market timing model.

1 comment:

  1. Well, finally unwound my positions. 49 days and 32 option trades later, I converted a loss to a 4.1% profit, albeit short of the 1% per week I wanted. What's next? The charts point to short gold and long small caps. Or is this the dead cat bounce that Naqvi calls the bear market rally?


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