Sideways Gyrations Continue!

With no clear message from the government to clarify the confusion related to Government Shutdown and Debt Limit, sideways market action continues. Futures are gaping down, but who knows by the time market opens Monday market, they might have reduced the gap down to zero.

In any case, at this point recent correction has lasted more than what was expected, and the buy signals are more than what were expected few days ago. This means that there is a higher potential of us reaching a significant bottom. However, since approaching IPM model is supposed to be a top, one of the following 2 scenarios might play out:

1- Market bottoms soon, starts a sharp rally. Pauses for few a days and then continues its rise
2- Market tops soon, and will decline sharply. Since DJIA has already declined sharply, topping scenario will best suited for Nasdaq and Russell 2000 and DJT.

In any case, I am writing this from JFK airport and will try to keep the blog updated while travelling abroad.

Another Decline But Why Such Disorder??

So today markets declined yet again, it can be attributed to president's panic button or to relentless bickering in D.C. In any case, market was down sharply in the morning. Although it recouped some of the losses by the end of the day, it still ended sharply in red.

There are two interesting aspects of this decline:

1- Except for DJIA, there is no order in the decline.  Market is going up and down, with some indices near the highs while others near the bottom of the range. This kind of behavior is not consistent with a start of a strong down trend.

DJIA is showing a sharp decline since September 18 peak.

Russell 2000 is showing sideways market action since September 18.

SP500 is showing a sideways to down action since Sept 18 peak. 

Cumulatively there is nothing impulsive about these three markets and their declines, which suggests that we should consider this decline as a correction within a primary up-trend.

2- Over the last 2-3 days, we have seen panic coming back into the market. Sentiment surveys have started to show less optimism. Moreover, we have also received 2 buy signals from VIX and NYMO indicators. Therefore, this is suggesting that market correction is approaching an end.

Based on this analysis in conjunction with the IPM turn window, it is possible that market might be setting up for a stronger rally than what we had anticipated 1 week ago. If DJIA breaks below August lows then rally scenario will take a back seat. 

Obama Says That Wall St. Should Be Worried!! Should You Be?

After a long time, we have witnessed something amazing today: President of the world's only super power saying that Wall Street and investors should be worried about the prospects of the economy because politicians in the congress cannot get their act together.

http://www.cnbc.com/id/101081257

First, this kind of statement coming from a president does not make sense. Secondly, will it really impact the financial markets??

The answer for the time being is NO!! Markets like to fool the majority, as we have said multiple time on this blog. Political uncertainty is the perfect tool to make people distrust the economy for the time being. As this distrust increases, market will start climbing the Wall of Worry built on the foundation of political discord.

Overall, market remains in an uptrend. Following chart shows a clearly impulsive rise from August 30 bottom (IPM Model Bottom Date) to Sept 18 Top  (IPM Model minor turn date). Since topping on Sept 18, market has declined in a choppy formation and has corrected 50% of the rise. This suggests that the market might have just completed a correction phase, and it is ready for another leg higher.

As long as 1675 is held, benefit of the doubt will go to the Bulls and we should expect further upside. Going long makes even more sense right now because this is the most difficult trade in the face government shutdown and political bickering in D.C.

Note: Next IPM Model turn date has been emailed to subscribers. IPM Model turn date can be used to time market entry and exit points.
  

IPM Model Update Emailed

IPM Model update has been emailed to subscribers.

Extract from IPM Update:
"In the last update it was stated that “There were three turn windows, and therefore, one should be careful.” It also mentioned that “there is a high probability of continued market rise till October 2013."

At that time no one believed in a sustained rally because of: Fed’s tapering decision, Fed’s new chairman decision, Syria military action, geo-political uncertainty, debt-ceiling debate, sluggish housing market, & rising interest rates.

Please note that IPM Model bottom date was August 30, and the market bottomed on August 30 @ 1628 and rose to 1730 on Sept 18 i.e. ~100 point rise in less than 3 weeks.

This is how market deceives the majority. Market is very clever!!

Government Shutdown (as Predicted) and Plan of Action

Two weeks ago, right after Fed's unexpected decision to hold-off on tapering, following was written at the blog:

"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."

It came true tonight! But the above analysis does not say how the market should or will react. In fact, as per IPM model we defined the market trajectory in August 25 and Sept 8, 2013 updates. Market has been following the script very precisely. 

So the question is what will happen next? There is a very high potential that market will rally into the next IPM model top date. In other words, it will rise in the face of political uncertainty, because this will be the least obvious trade. However, this rise will be capped by the IPM Model top date.

IPM Model update with detailed market analysis will be sent out to subscribers today! 

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  

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 ...