Thursday, March 7, 2013

New Highs & New Wall of Worry

Most U.S. Markets have reached all-time highs, except for SP500, which will most likely surpass its highs in the near future. Although this is a monumental achievement for the U.S. markets as they overcame losses of the Great Recession, the response from market participants and investors has been lackluster. News coverage has been anemic, sentiment surveys are not euphoric and there is no trust in the market among blog writers. This kind of behavior not only highlights the strong wall of worry that is in place in the financial markets, it also suggests that we will be seeing higher highs in the U.S. indices in the coming weeks.

There are two things about markets that always fascinate me: 
  1. Markets do what is least expected by the majority. 
  2. No matter what one says about fundamentals being bad, markets are always right because price pays not the opinion.
Keeping these two important points in mind, through experience I have realized that there is no one good method of analyzing the markets. In some cases, one indicator will suggest that the market is about to peak out, but others will be painting a contrary picture. We can see a similar situation right now: Some sentiment indicators are euphoric but others are pessimistic. For example, when market reaches all-time new highs there is euphoria among the public, people talk about it at offices and small investors start piling in.

Previously there used to be celebrations on the NYSE trading floor when DJIA reached new all-time highs, but this year there were no celebrations. In 2000 and 2007 there were news vans outside of the NY Stock Exchange, but this time there were no news coverage from global media (as per Art Cashin). Previously, financial news media was calling for further gains and time to get back into the market after new highs, this time media is suggesting a more cautious and how to protect yourself. And finally, individual investors are now more pessimistic about the market than they were 500 point lower in DJIA.

Some reasons behind this abnormal behavior include:
  1. Bad experience in the last 12 years with new market highs
  2. Political uncertainty, upcoming budget issues and sequestration cuts
  3. European problems
Although these are grave concerns, so far they have not kept the market from making a new all-time high. In fact, one can call them distractions until they really start mattering. In short, there is significant amount of pessimism in the market, which can help propel the market even higher. Some of the fundamental catalysts that can help in rising stock prices are:
  1. FED's bank stress test results - March 7
  2. ECB and BOE meeting – March 7
  3. Jobs Report on Friday - March 8
  4. FED FOMC meeting - March 20
Although fundamental events can hint towards potential market moving announcements, they cannot tell us whether the reaction will be positive or negative to the announcement. In this regard, the market's Elliott Wave structure shows the path of market's near term move. According to E/W structure, U.S. markets are in wave-5 of 3rd wave rise. This wave can last for another 1-2 weeks and could top near FED meeting. Detailed timing information has been e-mailed to subscribers via IPM Model update. As a result, the assumption is that fundamental news will result in positive market action. 

IPM Model picked the November bottom, December bottom, January top and February bottom. Next IPM Model update will be sent to subscribers on 3/15/2013. 

Note: IPM Model has been a very informative tool for market timing. If interested in IPM Model Subscription, please fill out the form below. IPM Subscription fee might increase in April 2013 for new subscribers. Model Performance


  1. Good comments, especially the observations about market's ability to confound the consensus. There is one observation above that I disagree with. You said "individual investors are now more pessimistic about the market than they were 500 point lower in DJIA." I am not sure which index or measure you are using here but mutual fund flows so far this year negate this point of view. We can't parse out individual from institutional investors in the fund flows data but for the first time in several years we are seeing consistently strong flows into active funds. In other words, surveys may be painting a pessimistic picture from individual investors but people are telling a different story with their money.

  2. I agree with your comments. As far as individual investors are concerned, I was referring to latest AAII survey, which is showing a lot of pessimism, especially with DJIA hitting new all time highs. the fund flow statement is also true but the funds flow went negative last week for the first time in 2013, as sequestration drama unfolded in DC. So, unfortunately as market marked the bottom people left the market in the midst of political uncertainty and new high nervousness. M Naqvi

  3. Does anyone have any ideas on how severe the upcoming "dip" will be? The Bank Stress Tests went great, Unemployment went down to 7.7%, ECB and BOE didn't bring anything new to the table we didn't already know - that Europe is in "dire" circumstances and may collapse as I'm writing this (like the last 18 months). Do we pull back to 1525ish on the SP500 then start marching back to 1600 or is a larger "dip" coming - say to 1480ish? I'm considering (heavily leaning towards) riding the dip (I'm 20% US equities and 10% EFA) then purchase more during the dip. Any thoughts? As always, be careful out there, Brad

  4. around 4% decline. It will be an intermidiate decline. If you hold on tight, you can still ride this whole long term trend up to 1600's. I will buy when i see a 4% decline.

  5. Thanks Joseph, I was thinking the same thing. The dip would be pretty shallow and with the limited amount of trades I get for a month on my retirement account, I was leaning towards riding this dip out (forget about the profit taking) and purchase more on the dip during the IPM window (go from my current 30% equities and EFA to 75% [28% SP, 27% DOW, 20% EFA; or 25% for all three - dollar cost average down a bit]) for the push to 1600 in the SP500. I'm also thinking with the "wall of worry" combined with the sideways action of late, things not looking so bad in the US markets, Europe is not that bad (hence the EFA ETF, it goes pretty lock step with SP500, not dollar for dollar, but close over the last 8-10 months or so - I also think it is poised to do well this year), that even 4% may be too steep of a decline. Like the last bottom in Feb., we may bottom mostly through time and sideways movement with a two or three day dip that didn't really get too close to the 50-Day (total about 3% dip). Trying to time the exact bottom is impossible, and with the clunky way I have to trade my retirement, it is even more impossible. I have to think of the best "probability" to get in and out. If I get out now with profits, I can't get back in during the IPM window, and I think after this IPM window, we will push for the 1600. I could lose a lot of upside movement between the IPM turn window and the new month (April) which allows me 3 trades (2 to get into the market and one has to go from equities to bonds) Does anyone have anythoughts I'm overlooking? Feedback? As always, be careful out there. Brad

    1. This is how i do it ( and i read it from Jim Cramer's Real Money): Buy in the dips and dont buy all at once. Say you have 10k... buy 3k at dip of 1535, then buy another 3k at 1520 and then buy another 3k at 1500. Keep 1k in cash. This is an aggressive investment with strategy. When everything goes up, sell with the same method (in portions).

      I may buy tomorrow Wed some inverse ETF's to short the market top and hope to make some money on the way down. But, i will be conservative because i will be buying against the trend. And you know what they say (trend is your friend) and now the long term trend has been UP.

      When the 4% (+/-) decline is down, i will sell my inverse ETF's (in portions as markets decline) and will be buying my longs to catch the upside.

  6. Market has been rising as expected. DJIA has rose for 8 straight days. This not only shows the strength of this rally, but also highlights the fact that there were so many doubters of this rally. However, we are now approaching a time where market is nearing a near term top. In fact yesterday, for the first time in 3 weeks, no one on the Fast Money half time report mentioned a correction. This can be a small contraion signal (Fast Money = Small Signals b/c fast traders). In Elliott Wave terms we are in process of forming minor wave 4. This could result in another decline tomorrow. But once this complete, we could rally for another 2-4 days. Along with EW count, there are few reasons to support this assertion:

    1- We have not received a Sell signal from our indicators
    2- IPM Model is calling for a bottm at the next trun date, which would require market to top soon
    3- Today's decline has again brought out a good number of bears, who are calling the top. I have made this kind of mistake in the past. Market rarely rewards traders who are early to the topping part in a Bull market.
    4- Fed Meets next week

    In any case, once we make a new high and possibly a new all time high in SP500 later this week or early next week, we will see a sharper decline. Which will again bring out the Bears.

    This market has proven to me why Bull markets keep on rising: Even at new All Time Highs, people and analysts keep on calling for correction!!

    I am busy with some stuff till Friday, but keep the conversation going and I will try to give my 2 cents when possible.

  7. Hi Joseph and Naqvi, thanks for the input. Essentually Joseph, that is what I'm doing. With your example, the first trade was 30% - like mine, and I didn't read Cramer - LOL!! Silly me! The next trasnaction on a pullback (not todays if we have one, but the IPM predicted bottom) would be another 30% according to your long position trading strategy which would give 60%, I was thinking of going to 75%, but you bring good food for thought. Maybe mine is a little too agressive for the "toppyness" we are experiencing in the market and the more conservative 60% would suffice and give better protection to the downside (the remaining 40% is in bonds). I like it, and remember with the last position with your method, go another 30%, but I think that is to much for my risk appetite, I may go 15% and get to my 75%, but who knows. After this upcoming bottom in the IPM, the next bottom could be months away. It sort of depends on the IPM update this weekend. Thats is my retirement portfolio. I'm starting a TD Waterhouse portfolio for more swing and option trading (I'm in the process of piling up cash into the account as we speak). My thoughts on your short, go ahead and do it, but be tiny/small. You're going against the trend like you say, so don't go big! Thanks for the thoughts and as always, be careful out there.

  8. Yes, I was a bit aggressive on my previous explanation. I usually end up buying half of what I think I should do. :)


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