Thursday, September 6, 2012

Divergences are Abound

Over the last few weeks market has shown pure resilience. It has refused to go down in the face of so many head-winds. But the question remains: Will this resilience result in a breakout? Or will it just attract more longs before breaking down?

Since mid-August one can see that glaring divergences have appeared across world indices. Although US indices are near the top, global index is much lower than the August high. Furthermore, England's FTSE, Japan's Nikkei, and Emerging Market ETF (EEM), are all showing serious market damage.

This kind of market action suggests that there is something wrong!! Either US markets are out of sync and will soon start to breakdown or US markets will soon pull all other markets to new highs. Based on the global economic environment with China's economic slow down, European recession, sovereign debt crisis and global political uncertainty, I think that US markets will follow the global markets and will soon start to move down. At this point, the question remains how soon, because we are running out of time in terms of the IPM bottom turn date?

Along with these developments, the sentiment indicators are showing red signals with optimism at very elevated levels. Moreover, Barrons recently came out with a Bullish magazine cover. This kind of optimism typically signifies a market top. Therefore, sentiment analysis suggests that we should be very cautious.

Along with sentiment there are some anecdotal observations that I have made over the last few weeks:
  1. Several stock market analysts, who have been reluctant to go long this market since 2010, have recently started buying stocks on leverage. Since these people are very influential, they must have convinced a lot of readers to buy also. Now the question remains, is the stock market going to play a hand on them and make them pay for their big bets??
  2. Apple recently won a huge patent fight against Samsung, giving them the ability to become the sole manufacturer of flat screen apple based smart phones. This ruling will enable Apple to sue other competitors for design similarities, thus amplifying their profit potential. However, since stock market is a forward looking mechanism, this kind of announcement (which is surely great for Apple) typically arrives at or near the top of a stock. So it will be interesting to see Apple's stock market action. If Apple does top out, it will take down the entire Nasdaq complex. 
  3. Netflix announced in July'2011 to increase rates. At that time everyone thought that it was the best decision because Netflix had no competition. However, the stock topped within 1 week and has since declined from $306 to $55. Be aware of Apple!!

In short, although it might be very tempting to buy over here, it will be prudent to wait for SP500 and DJIA to break above 1416 and 13200 respectively, and then jump in on the long side.


  1. Well, now we have something interesting. The DOW and SP500 have broken above the channel for a "breakout" and is an indicator to go long. But, is this a head fake because there is a lot of short covering and chasing the tape pushing the market upwards? Seeing how I think the ECB said nothing new of substance (especially when Germany asks the ECB "where are you going to get the money for this buyback plan?"), I think people will sell into this rally and we will start to see a drop. For me, I'm waiting to see if the SP500 stays above 1420 into next week. If it does, we will be getting close to the IPM turn window and assuming the turn window is for the market to go up, downward risk becomes limited because we are entering into the most profitable 6 months of the trading year (October through March). Any thoughts? At any rate, be careful out there...Brad

  2. Can this rally breakout to the upside? Maybe. Today's move up has gone higher than the April/May high of 1418-1422. The summer rally from 1330-1340 until today it seems to be more of a Wave 3 than a Wave 2 (medium term speaking). Long term speaking, it could be a Wave 5. I thinking as such because this rally has broken this year's high. I'm also thinking more in EW theory. Now, with today's rally, it may change people's mind about the market and they may buy long.

    I am going to wait until we go over 1440 and then go long.


  3. Naqvi – with yesterday’s violent market rise does your thesis hold that SP500 and DOW above 1416 and 13200 respectively is the time to go long? It seems that the market talking heads are split 50/50 if this is a breakout or the top. With the Fed meeting coinciding pretty much with the IPM turn window, is the turn window going to signify a bottom before going into the 6 most profitable months or a top? Roubini believes that the employment number signifies Ben’s chance to do QE3, but Roubini hasn’t been right since 2008. After much reading and getting the lay of the land, I’m thinking that we will have a 50% retractment back to around your 1416, then we take off to 1490ish. To get to the 1416 retractment time wise COULD take us to the IPM window. Any thoughts? At this snap shot in time, that is my game plan, and I’m on the sidelines until 1416-1420ish. In any case, be careful out there! Brad

  4. Also, if SP500 dips to 1390ish during the IPM turn window, I'm out ASAP! Brad

  5. Guys, I have just got my IPM software working. It was out of order since early August. That is why a clear date was not generated. This development has disappointed me as the market might have bottomed within the IPM turn window (on September 6). I am going to re-run the model over this weekend, and see whether the correction that was being anticipated from 2nd week of August till early/mid September already happened in the form of sideways correction and the market has broken out?? It will be interesting to see what the model will be saying for the next turn date.


I would love to hear from you! Please leave your comment below!!