Friday, September 20, 2013

Fed Decision & Gov't Shutdown: This Time Its Real (Part 2)

Part 1

This question suggests that either Fed does not think the economy is strong enough right now, which means there is some thing fundamentally wrong. Or they are anticipating a major shock in the near future. This leads us towards the upcoming budget discussion and possible government shut-down starting on October 1, 2013.

I think Federal Reserves' was looking ahead and they saw a real policy of a government shutdown in October, along with another long-drawn battle on debt-limit increase. That is why, they preemptive these political uncertainties by giving another doze of steroids to the market so that the impact of political stalemate does not ripple through the stock market, and consequently does not derail the nascent economic recovery.

As far as the political stalemate is concerned, this time it will be bad! On all previous occasions politicians started working on the debt-ceiling / government shutdown issues at least ~2 months in advance, with media shouting about this possibility ~3 months in advance. For example, in 2011 debt-ceiling was being discussed in the media in April/May time frame, months before the actual stock market decline in August.

But this time, it is different. Today, was the first time I saw something on the news about a potential government shut-down in a financial news outlet. This means that lawmakers are not taking this shut-down seriously with only 2 weeks left to the the shutdown. This will be followed by debt-ceiling debate, which needs to be settled in less than a month. And finally, since Republican lawmakers have been burnt by sequestration earlier this year, it is highly unlikely they will easily cooperate on this issue.

All of the above mentioned scenarios combined, suggest that there a lot of headwinds for the market in the near future. Under these circumstances, we will analyze the IPM model for trade timing  

Thursday, September 19, 2013

Fed Decision & Gov't Shutdown: Logic Behind Fed's Decision (Part 1)

So everyone was surprised by what Fed did yesterday. In fact, it is one of the times after a long time that I have seen so many people caught off-guard. Since I was expecting the market to go up after the announcement of the taper, I was not surprised by the rally after the announcement. I was surprised by the announcement to not taper. And to be sure, this surprise was equally shared between financial news media and economists. Since the surprise decision is now out, the question remains about the context of this decision.

In real world economists, Federal Reserve's officials, treasury analysts and central bankers typically make policy decisions based on fundamental analysis of macro-economic indicators. These indicators tell them how to manage their policy to control inflation, foster job growth and spur economic activity. Therefore, it will be very insightful to analyze the implication of federal reserve's recent decision of "not to taper" from a fundamental & socio-economic perspective.

For one, since everyone was expecting a taper decision. "Not Taper" turned out to be a perfect contrarion trade.

On the other hand, from a fundamental perspective the consensus was that Fed will start tapering its bond buying program in September 2013. And the reason behind this assumption was the language used by Fed's officials over the recent meetings was getting Hawkish. In these meeting's Fed's officials had started becoming "Hawkish" about the fiscal policy i.e. they were getting concerned about the potential increase in the inflation rate due to extremely accommodating monetary policy.

Behind the shift in Fed's language towards stricter monetary policy was recent economic data which was hinting towards robust economic growth in the US economy, along with significant gains in the housing market and stock indices. However, this data was available to the general public all over the world, and the data did not get worse over the last month or so.

Therefore, the question is: "What did the Federal Reserves' see differently during the September's FOMC meeting, which forced them to keep the extraordinarily accommodative monetary policy intact?"

This article will continue in next part ...

Quick Market Update

  1. Emerging Markets have re-entered Bull Market
  2. Global Stock markets continue to be in Bull Market since December 2012.
  3. Will be buying on a dip, based on Trade strategy.
  4. Next significant top (at least for 2 week decline) will occur near next IPM top window (subscribers know the date)
  5. Weekly IPM model has been analyzed, and new date has been received
  6. Based on recent rally and re-emergence of emerging market Bull, it is likely that a Major Top will take place near Weekly IPM Model turn date.

Near term, market is over-bought, over-crowded  and over-optimistic. It will go through some consolidation over the next few days!

Details will be published later

Sunday, September 15, 2013

Fed's Taper & Market Reaction

Federal Reserves will make a decision about its monetary taper in this upcoming week. Majority of analysts are expecting a taper. The question one should be asking right now is that how will the markets react to Fed's decision to taper. This is because only market's price reaction to the news pays, and not what the news was. As for the market, it has been rising nicely for the past 2 weeks. In fact, after bottoming on August 30 (the IPM Model bottom date), market has rallied to 1690 in 2 weeks i.e. an increase of ~70 points.

As we approach this critical week, markets are over-bought and some sentiment measures are touching optimistic extremes. This type of market behaviors asks us to be cautious over the next week or so.

If we had a Federal Reserves meeting scheduled with possibility of taper at a time when sentiment was pessimistic and market had been over-sold, it would have been a good time to buy the FOMC meeting's outcome. However, current market structure from an Elliott Wave perspective along with Market Matrix's analysis suggests that we might be in for a sideways to down market over the next few days.

From a global perspective, emerging markets are in a very interesting position. These markets have been in a downtrend since January 2013. Although they have seen a sharp rally over the past few weeks, this rally has brought the emerging market index at a critical resistance level.  If EEM fails to break sharply above recent highs, there is a serious potential that downtrend will resume.

Please note that according to proprietary market classification methodology, emerging markets recently entered a bear market in May 2013, and have been in a bear since then. Now the question remains if they will be able to break into a bull market, or the Bear will re-assert itself. Bear's reassertion would lead to widespread consequences. Next week will give us a better picture of how the emerging markets will react to Federal Reserve's monetary policy decision.

Finally, futures are rallying sharply on the decision of Larry Summers withdrawal as Fed's next chairman. This rally has taken most of U.S. indices to all time highs. It falls nicely in line with September Strategy

Friday, September 13, 2013

Market Analysis & Action Plan

Initial Target has been met for the long trade.

Following reasons for concerns are now appearing in the market:

  1. TRIN reading is at a point which has coincided with previous rally pauses. TRIN is suggesting an over-extended market
  2.  NYMO gave a sell signal few days ago. So it is something to look at with all other indicators piling up.
  3. NYAD and TICK: Both are not suggesting that recent rally has been broad based. Therefore, one should be on the lookout for potential downside.
  4. Money Flow Index: Has not registered an overbought reading, which means the potential for a rally continuation are bleak. Money flow index overbought reading typically suggests rally continuation.
  5. Sentiment is getting very frothy, especially from a put/call ratio perspective
  6. Elliott Wave analysis suggests that DJIA and SP500 are carving out 2nd waves, with final rally approaching soon.
  7. Global Dow has approached overbought levels. These levels have previously corresponded with near term declines.
  8. We are approaching a minor IPM turn window (subscribers: please consult IPM model update).

Keeping all of the above in mind, following action plan makes sense:
  1. Exit (1/2) around 1690
  2. Exit all in the near future to protect against Fed's decision and market's knee jerk reaction
  3. Re-enter during next IPM model turn window
  4. Exit by earnings
  5. Overall, market is setting up for a lower high at the next Major IPM model turn window (please consult IPM Model update sent on September 5, 2013). This trajectory is highlighted in the IPM Model library

Tuesday, September 10, 2013

Predicted vs Actual - IPM Model Updates

Following chart highlights the IPM Model turn dates and the corresponding market action, in regards with DJIA. Won't it be great to go short at the top, and hold on to short through the exact bottom date, where you can go long again! 

September 2013 Trade Strategy

IPM Model Top Prediction on August 5, 2013

IPM Model Update: Latest IPM Model update was emailed to subscribers on 9/8/2013. Data is still fresh. So if interested, subscriber below:


Sunday, September 8, 2013

IPM Model Update

Latest IPM Model update has been emailed to SUBSCRIBERS

Excerpt from IPM Model Update
In the last update on August 25, it was stated that “market could experience one more decline over the next week before bottoming out to rally for a few weeks. As the market rally unfolds, we will keep an eye on internal strength indicators to evaluate future of the market i.e. new highs or lower high.” Market was at 1668 on August 26 and then declined to 1627 on August 30, which has been the low.  

Now, it is time to evaluate the current rally and its future prospects especially when Syria War, Fed meeting, and new Fed chairman decisions are on the table. Next few days will be very interesting, as they will set the tone for September.   

Wednesday, September 4, 2013

September 2013 Trade Strategy

September 2013 Trade Strategy

This strategy is based on IPM Model turn date, TPAP model and current market matrix analysis

Monday, September 2, 2013

Market Trajectory & Trade

There are two possible trajectories for the market from IPM Model Turn Window (closest) to IPM Turn Window (next)

1- Bottom ==> Top (sharp rally)

Indicators: Weaker internal negative strength on the decline. No new low after IPM turn window expires.
Suggested Market Behavior: Strong rally after bottoming during IPM Turn window
Trigger: Rise above xxxx
Timing: Market will show its cards during 2nd half of the closest IPM turn window

This scenario could result in multi-week rally from the IPM model turn window

2- Bottom ==> Lower Low ==> Top (sideways to rally)

Indicators: Strong internal negative breadth on the decline. New low after IPM turn window expires.
Suggested Market Behavior: Continued decline immediately after IPM Turn window expiration
Trigger: Rise above xxxx
Timing: Market will show its cards during 2nd half of the closest IPM turn window, which will enable us to asses the negative breadth of the market.

This scenario could result in multi-week sideways action before topping out at the next IPM model turn window

Scenario 1 has a higher probability based on Market Matrix analysis. However, we need to wait for a market trigger and keep stop losses in place to minimize losses.