Downtrend Confirmed by 8/4 Test

Market just experienced the worst month since May 2012, but sentiment did not reach extreme. Although we did receive some buy signals, panic selling was not recorded. In absence of panic selling, it is hard to say that decline has ended.

At the same time, 8/4 Test (on daily time frame) to the Downside has been completed in multiple markets, including:

• DJIA
• SP500
• Russell 2000 (very close)
• Global Market Index

This suggests that the trend is now down. Although we are still in a bull market, we should be careful about some acceleration to the downside.

Overall, it is clear that multiple market indicators: 8/4 Test, Sentiment, Elliott Wave, Trend and Supporting Market, are now aligning to indicate that further market decline is in front of us.

Please note that IPM Model turn date has been emailed to subscribers. This update will also include potential trade strategies over the next few weeks.

Note: Understand, Survive and Thrive started predicting about an approaching downtrend since May top because May top coincided with the "Weekly IPM Model" turn date. In the hindsight, that was the time when Real estate index, Emerging markets, Utilities and other front running supporting markets did top out. Therefore, IPM Model has some serious predictive powers by the grace of God

IPM Model Top Prediction on August 5, 2013

IPM Model predicted the latest stock market decline to the day i.e. Stock Market Top on August 5, 2013:

August 5, 2013 IPM Model Update

"Latest IPM model re-run suggests that we are within an IPM Model turn window, which is

scheduled for August 5, 2013 (+/- 4 days), and according to statistical calculations it should

mark a market Top. This means that recent slow grind higher is coming to an end, and we will

soon see a decline in the U.S. markets."


"All of the above analysis suggests that market could soon start a decline phase which could last

for few weeks."

Fed's Dilemma: Stop QE, Continue or Increase!!

Recently we have hearing a lot about Federal Reserves tightening the monetary policy towards the end of this year. This assumption is based on clues coming out of the FOMC meetings. Latest news came out on Wednesday, when the Fed's minutes showed that FOMC committee members are much more "Hawkish". Let me first explain what do these words "Hawkish" and "Dovish" mean.

Hawkish: Favouring increasing interest rates; inclined towards increasing interest rates.
Dovish:  Disfavouring increasing interest rates; inclined towards not increasing interest rates.

Let's analyze Fed's mandate. Federal Reserves has a dual mandate:

1- Control inflation:
2- Maintain unemployment levels

Fed controls inflation by increasing or decreasing interest rates. Inflation is caused by free movement of money in the system. If there is more money, it will cause inflation. If the money supply is reduced, it will reduce inflation or even cause deflation.

Typically, when economy is growing it causes inflation because people have more money and they tend to buy more. This increase in buying power results in higher prices of stocks, real estate, commodities and other investment instruments, which in turn forces people on the sidelines to join the buying frenzy.

Under such circumstances, Federal Reserves uses interest rates to reduce inflation. They increase the interest rate to give an incentive for people and institution to save versus invest. Since investors can earn higher interest without taking any risk, they prefer to save. Saving money in banks results in lower monetary supply, resulting in lower number of buyers of stocks, commodities and real estate. This helps in cooling down inflation.

Lower demand forces companies to adjust their production. For example, if there is low demand of housing then construction companies will lay-off people. Housing industry will be followed by other industries, which will result in higher number of layoffs and an increase in the unemployment rate.

As a result of increased unemployment level fewer people will be able to buy, resulting in lower inflation. As inflation goes down and unemployment goes up, Federal Reserves again uses its interest rate tool to adjust these two areas. However, this time they reduce the interest rate. By reducing the interest rate, they reduce the incentive related to savings. This reduced incentive forces individuals and banks to again start investing in the investment areas, which again increases the monetary supply. And the cycle starts again.

This cycle allows FED to maintain the economy in the perfect state of equilibrium. However, right now Federal Reserves has a very strange dilemma at its hands. Interest rate maneuvering & QE has not improved overall unemployment situation. And now, interest rates have started to go up in anticipation of inflation caused by QE induced price increases, even without Federal Reserves increasing its rates. In other words, market is telling Federal Reserves that if you won't increase the rate, we will do so without you.

So Fed has two options now:

1- Keep the rates low, with the hope that people will keep on investing and inflation will not start rising. This option is bad because it will result in increased inflation, which will result in higher rates. Higher rates will choke-off ability of investors to invest in business activities. Thus, choking off economic recovery.

2- Increase the interest rate to kill inflation expectations. This reduction in inflation expectation might result in a decline in interest rate, in the next few years but it will bring back deflation fears. Higher rates from Federal Reserves, will reduce investment incentive at the bank-level. Again choking-off the economic recovery.

Under both scenarios, Federal Reserves' is playing a losing games. Logically, Fed will go with option 2. This will allow them to reduce inflation expectations, keep investments going a bit longer. Reduction in expectation will result in lower interest rates in the interim. However, in the long-run we will experience another bout of Deflation, and possibly another stock market crash.

This analysis flows well with the current bond market's technical picture and the housing industry's forecast. Both of these trends combined suggest that a very good time to buy houses/real estate is coming in the near future. 

2009-2013: Real Estate and Housing Rally Analysis

In this post, we will be analyzing Real Estate and Housing sectors' rally from 2009 low. This analysis will help us better understand the nature of this rally, and its future directional implications.

The first chart shown below is of the Real Estate index. This chart clearly shows a 3-wave rally from 2009 low. 3-waves are corrective in nature. Therefore, the rally from 2009 to 2013 can be regarded as a market correction. Following chart also shows a major trend line from March 2009 lows. This trend line had so far contained the up-trend, but it has recently been breached to the downside. This also suggests that the up-trend in trouble.

Second chat, is also of the Real Estate index. In this chart one can see that Wave-Y ~= 0.61 x Wave-W. This is a classic wave Y relationship. Although it is not perfect, it is close enough. This is yet another reason to be careful about Real Estate stocks and the overall Real Estate market.

Finally, the third chart shows a 3-wave rise in the housing sector. This chart is of XHB (another housing ETF). The best aspect of this chart is that it has formed a very nice parallel channel since March 2009 bottom. Parallel channels, after a significant decline (2006-2009), typically symbolize bear flags. And are followed by resumption of the trend in the primary direction.

In summary, all of the above 3 charts suggest that the rally from March 2009 to May 2013 has been a corrective wave. And as long as Real Estate/Housing markets do not rally above May 2013 high, we should be on the look-out for another bear market in the housing industry. This would mean that housing prices will suffer further, which will in turn impact the overall economy. 

Real Estate Market - End of Recovery?

Yesterday House Builders Index was analyzed in terms of Elliott Wave count, to gain a better understanding of their future trajectory. Today, we will continue the housing analysis by analyzing the Real Estate index. Real Estate index is a very good barometer of the overall Real Estate market.

Real Estate market is a very broad category. It ranges from residential properties to commercial building, rental properties to investment complexes. Therefore, a decline in this index means that something is fundamentally wrong with the market. On the other hand, if this index keeps on rising, it means that underlying fundamentals behind Real Estate industry i.e. demand/supply metrics are nominal.

Like housing, real estate plays a pivotal role in the U.S. economic growth. If real estate and housing both are pointing back down, it will put significant pressure on the U.S. economy. This can be very bad for the overall economy, especially at a time when economy has not reached escape velocity and FED is considering tapering.

Following chart highlights the Real Estate index:

As evident from the above chart, real estate index went through a clear 5-wave decline (2006 to 2009). This decline suggested that the trend in the real estate market had turned from up to down. However, even in downtrends markets experience counter trend rallies. And that is what we have seen in the real estate market from 2009 to 2013.

This rally has taken on an overlapping shape, with market tracing out: A-B-C - X - A-B-C. Each A and C wave can be sub-divided into 5-sub waves. Due to this overlapping structure, and 3-wave market action, one can safely assume that rally in the real estate index from 2009 to 2013 was a corrective rally. Once this rally is complete, which it probably is, we will see a resumption in the downtrend.

When we evaluate Real Estate index rally in terms of Fibonacci levels, we realize that rally from 2009 to 2013 retraced 78.6% of the original decline from 2006 top. This is a classic wave-2 retracements. Such deep retracements not only bring back optimism, they also bring back new buyers into the market with the assumption that bottom is in place and we will go higher from here. Right at that time, wave-3 down starts which wipes out all the gains made during wave-2 and then some.

Therefore, based on the above Elliott Wave & Fibonacci analysis, it seems like the Real Estate market is close to a top. This observation is further supported by the Head and Shoulders formations appearing in the Housing and Real Estate indices. A top in Real Estate index might be the start of another recession in the U.S., and probably the world!

Note: Real Estate index topped on May 15, 2013. This was the same date when the Weekly IPM Model predicted a top!!! After few years, we might see back & realize that the recession started in the United States on May 15, 2013.


IPM Model UpdateIPM Model again predicted the market top on the exact date - August 5 (by the grace of God). Subscription

 

 

Housing Market - Down Trend Resumption

As mentioned in the last post, housing market and real estate markets have completed a Head and Shoulders pattern. This pattern is considered to be a topping formation, and is followed by significant declines. A similar pattern was completed by Emerging Markets (link) and Bond Market (link) in April/May time frame, which resulted in a sharp decline in both of these markets.

Since this pattern is now showing up in both real estate and housing markets, we should be careful of a similar sharp decline in the U.S. housing ETF, which would mean that the overall housing industry is going back down. This downtrend in housing might be a pre-cursor to another leg down in the overall U.S. economy because U.S. economy is greatly dependent on the housing market.

In order to better understand the U.S. housing/real estate markets longer-term trend and to take current H&S formation in perspective, we are going to analyze the long-term Elliott Wave analysis of these two indices since 2005-2006 market peak. Although we did not notice it till much later, 2006 really marked the start of the recession in the U.S. economy.

First chart shows the Dow Jones House Construction Index. It is evident that from 2005-06 top, market declined in a clear 5-wave fashion to mark a bottom in 2009. To remind everyone, 5-wave declines mean that the primary trend is down, and these declines are typically followed by a sharp rally to correct the initial decline.

This initial 5-wave decline was followed by a 3-wave rise (also shown below) and demarcated by A-B-C. 3-Wave rise are corrective in nature, and typically suggest that the primary trend (downwards in this case) will soon re-assert itself.

This analysis tells us that from an Elliott Wave perspective, house builders have completed their corrective rally, and will soon start another leg down. This would indicate that housing overall will again decline in the future.

From a Fibonacci perspective, following chart shows that the recent rally in house construction index has undergone a common ~38.2% retracement. This retracement is in harmony with the 2nd wave corrective action, and tells us that we should expect further declines.

To conclude, long-term Elliott Wave analysis of the housing sector suggests that we will soon experience further pain in this sector. In the next update, we will explore the real estate sector to further understand the overall housing industry and its future direction. Overall, if this index does not make a new high soon, we will soon start to see a lot of "For Sale" signs in our neighborhood. 

Housing Market - Near Term Picture

Today's housing start data was very upbeat, and it would result in a lot of optimism towards the housing recovery. It seems like more people are buying new houses, even with higher interest rates. This seems to be contradicting news because few weeks ago, main stream media was suggesting that higher interest rates will choke off housing recovery.

The above mentioned analysis suggests that housing is back and it will not be derailed with higher interest rates. However, housing sector's chart pattern does not look good. There is something fundamentally wrong with the market.

As we know that Stock Market prices in the future 6 months out, stock price pattern are a good indicator of future health of an industry. Right now, the pattern in the housing ETF is suggesting that housing market is topping out. And recent good news might be followed by bad news in the future.

Following chart is showing a head and shoulders pattern being developed in the House Builders ETF. Head and Shoulders are typically considered to be a topping formation, and their completion results in significant market declines. Head and Shoulders pattern show distribution area, where long-term investors start selling their positions and new entrants into the market, start buying based on the media news and economic reports.

  
Head and Shoulders pattern, like any other technical pattern, takes on even more importance when it is not recognized by the majority of media. This is the current situation with Head and Shoulders pattern in ITB. I have hardly found a single media outlet or blog site, which is showing this pattern. Therefore, we should be watchful for a breakdown in the housing stocks. This breakdown will be accompanied by bad economic news related to the housing industry in the near future.

At the same time, Real Estate index is also sporting a Head and Shoulders pattern. This pattern is also almost complete (shown below) and it does not bode well for the overall economy.

To summarize, housing industry and Real Estate industry are the main stay of the U.S. economy. If the housing/real estate industry starts to suffer, it will result in a downtrend in the overall U.S. stock market and the U.S. economy. A similar situation arose in 2005-2007 time frame, when housing/real estate stocks peaked before SP500. Everyone knows about 2007 peak but hardly anyone knows that the real peak started with housing & real estate industries' underperformance. Therefore, it is crucial to keep an eye on these two sectors.

In the next update, we will analyze housing in the intermediate term.

Custom Investment Analysis
As you know UST performs custom consulting analysis per user's specific needs. For example, Gold analysis sent to clients. Recently a similar analysis was performed for a client regarding housing industry to make investment decision. If interested in custom analysis, please send an email to subscription.ust@gmail.com

IPM Model Update
IPM Model again predicted the market top on the exact date - August 5 (by the grace of God). Next IPM Model update will be emailed to subscribers on August 19, 2013. If interested, subscriber below (1st month is free):

  

 

Is Housing About to Take a U-Turn: Road to Recovery to ...

In the recent days, Housing stocks have lagged behind the overall stock market. This lag has recently taken on a very interesting turn. In the next 3 articles we will explore:

1- Near-Term Technical Pattern
2- Longer-Term Pattern
3- Fundamental picture

Latest IPM Model Update has been E-Mailed

Medium-Term Elliott Wave Analysis of Gold

Since the last update, Gold has staged a nice rally from 1280s to mid 1330s. Recent rise from 1180 low has taken up a 5-wave form, which suggests that there is a very high potential that Gold Market has put in an intermediate term bottom. In this post, we discuss Gold's medium term Elliott Wave structure to understand future trajectory. This analysis will help us further understand whether Gold has bottomed or not. Time frame of market data starts from September 2011 Gold top.


In September 2011, Gold prices topped above $1900. I can vividly remember that at that point in time, we were reading news about Gold dispensing ATMs, Mr. T was on TV with his gold jewelry, analysts were forecasting $5000 gold, and news articles were proclaiming record Gold prices. In fact, on a personal account few of my family friends went to New York to purchase physical Gold because they were amazed by the 10 year Gold bull market. This anecdotal evidence alerted me that something was wrong with the Gold market. 

Incidentally, that was the time when Gold market was topping. And since then it has declined for almost two years. Following chart shows this decline in its entirety:

Gold Decline - Sept 2011 to Aug 2013

 

Gold's decline has taken up a classic 3-wave decline form. This decline can be labeled as W-X-Y, with a sequence of 3-3-5. Typically, a 3-3-5 pattern is attributed to a market correction because it corrects a rally. Since Gold rallied from ~$200 to ~$1900 in little more than 10 years, we have seen a sharp correction to take back some of those gains.   

 

This 3-3-5 pattern is also known as a FLAT: 

In a flat correction the first actionary wave, wave W, lacks sufficient downward force to unfold into a full five waves, the X wave reaction seems to inherit this lack of countertrend pressure and, not surprisingly, terminates near the start of wave W. Wave Y, in turn, generally terminates beyond the end of wave W. Degree of extension varies by the nature of the flat and the associated sentiment behavior. 

 

Wave W

Following chart shows wave W (from Sept 2011 to Jan 2012). As one can see this wave can be easily sub-divided into 3 sub-waves. 3-waves, as mentioned above, indicate market correction and therefore, we can say that from the very start of this decline Gold was only supposed to undergo a correction, and was not entering a new long term (10+ years) bear market. 

 

 





 

Wave X
Moving forwards, we can see wave X in the following chart (from Jan 2012 to Oct 2012). This wave is again sub-divided into 3 waves, with waves a and c being equal. This development highlighted the fact that Gold's rally in first half of 2012 was just Wave X, and there was one more decline left. This decline would complete the correction that started in September 2011. 

Wave Y
Finally, following chart shows wave Y, which is sub-divided into a clear 5 wave structure. Furthermore, each sub-wave can be easily sub-divided into 5-waves. This pattern is a classic 5-wave pattern, which was supposed to terminate the 3-3-5 pattern. After wave X was completed, we needed Wave-Y to complete the corrective pattern. 5-Wave decline from Sept 2012 has provided that needed decline phase.

Completion of 5-waves down should mark the completion of Wave Y decline. Collectively, this should mark the end of the flat pattern (3-3-5), which will give way to a new bull market.

One of the characteristics of Wave Y's is that it is accompanied by extreme selling force, and results in extreme pessimistic sentiment. Although we will be discussing Gold market sentiment in one of the upcoming updates, pessimism towards Gold is at all time highs. And this is a very constructive development to support the concept of bear market completion. Moreover, decline in Wave Y has been accompanied by extreme selling pressure, which is yet another hallmark of Wave Ys.

In short, from an intermediate term Elliott Wave perspective, it seems like  Gold market has completed its correction phase and should soon embark on a long term rally.