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.
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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