I would not have had to invest or work at all if I had $100 for every time I heard an analyst tell me that the market is just not trading upon fundamentals at this time. In fact, when the market seems to disconnect from the fundamentals, analysts view it as the market being wrong.
But, isn’t it my responsibility as an investor to align my investment account with the market rather than the “fundamentals?” So, I would much rather be wrong and profitable rather than be right and in the red.
Take a step back and think about this. When the market was hitting its low in 2009, were the fundamentals bearish or bullish?
I think we all can reasonably recognize that the fundamentals were extremely bearish as the market was hitting its lows in 2009, with expectations of further lows to come. Yet, that is exactly when the market struck a very long-term bottom and began the bull market within which we now find ourselves (yes, I only consider this a correction within a larger bull market off the 2009 lows).
How was it possible that the market turned higher and began a major multi-year bull market when the fundamentals are so bearish? Well, if you understand that market sentiment leads fundamentals then you will understand how this can happen.
You see, markets bottom when there is no one left to sell (when bearishness reaches a climax), and markets top when there is no one left to buy (when bullishness reaches a climax). It really is as simple as that. Yet, the fundamentals lag these stock market events by many months. This is why we often see markets top on good fundamentals and bottom on negative fundamentals. And, I have explained this perspective in prior articles.
As I have often quoted Professor Douglas, former Luksic Scholar at Harvard University, former Deputy Research Administrator at the World Bank, and former Senior Economist at the IMF, since he presents this perspective rather well:
“. . . financial markets never collapse when things look bad. In fact, quite the contrary is true. Before contractions begin, macroeconomic flows always look fine. That is why the vast majority of economists always proclaim the economy to be in excellent health just before it swoons. Despite these failures, indeed despite repeating almost precisely those failures, economists have continued to pore over the same macroeconomic fundamentals for clues to the future.”
So, as many analysts hold fast to their bullish perspective based upon the fundamentals, we will likely not strike a long-term bottom just yet. In fact, my work, along with Professor Douglas’s suggests that they, along with a majority of market participants, will have to turn extremely bearish in order for us to strike the bottom to this correction.
Therefore, as long as we continue to see the majority of articles explaining to us that the fundamentals still remain bullish, we will not likely strike a bottom. And, by the time we do reach my long-term target in the 2100-2200 region for this correction, many of the “fundamentals” will likely have turned bearish.
The question many are now trying to answer is what the “cause” of this drop seems to be, especially with many viewing the fundamentals of the market as still being strong? It seems that some are questioning whether it was the Fed that caused this recent decline. But, the Fed has been quite transparent about its intentions and there were no surprises in the recent Fed action, therefore there was nothing new presented to the market which should have caused such a negative selling loop.
As Erik Ristuben, the Chief Investment Strategist at Russell Investments, noted:
“Responding to a question about quantitative tightening, Powell said that the Fed’s balance sheet runoff is on autopilot – and that really seemed to spook investors,” Ristuben said, adding that he found the strong reaction somewhat surprising. “Both Powell and former Fed Chair Janet Yellen have previously talked about shrinking the balance sheet (by up to $50 billion a month) in automatic fashion,” he noted.
So, is it the Fed or is it not? I think Mr. Ristuben is joining the rest of the market in scratching their collective heads as to what the true cause of this decline has been, especially since he dismisses the government closure as a cause. (And, if you disagree with Mr. Ristuben regarding the government closure, I addressed this issue last week).
Anyone following my analysis should not be surprised by this reaction in the market. In fact, the members of Elliottwavetrader.net were prepared for this decline well before it took hold, as I noted in our chat that I was going to cash when 2880 in the S&P 500 (SPX) broke.
Lately, I even saw one commenter to another article who noted:
“I have been following a few good technical traders, they all did very well in the past number of years, but this time around, only one of them (the wave guy, you know who) was right, all the other ones get caught on the wrong side.”
The main reason why so many have been caught looking the wrong way recently is because they do not realize that the market does not need a “cause.” The market will do what it will do based purely upon market sentiment. Unless you have a deeper understanding of market sentiment, this decline probably caught you by surprise and has you scratching your head too.
When the cause of a market decline is clear based upon current events, pundits are easily able to present their superficial exogenous causation theories of market movement.
But, when there is no clear cause, we see much head scratching, especially when the fundamentals are still strong. Befuddlement regarding this decline seems to be the perspective of the day, as this decline seems to have caught many by surprise. So, you are clearly not alone.
Last week, I warned our members of Elliottwavetrade.net about an impending market drop which can “feel” like a crash:
“Currently, while I had wanted to see a larger rally take us above 2800 before we saw a bigger decline in the market, we are seeing signs that the rally to 2815 may have been all we see. Market resistance is now at 2635-55, followed by 2720. Unless the market can exceed those levels, and soon, we actually have a set up in place now to drop below the 2400-50 support I had wanted to see hold before a bigger rally takes hold. And, if this pattern triggers in the coming weeks, it will “feel” like a crash to many as we enter 2019.”
In the near term, the 2520-50SPX region is our new main area of resistance. As long as we remain below that resistance, the market will likely subdivide towards the 2250/2335SPX region next, and we will continue to move our resistance points down as we continue to decline. In fact, that may even provide us with a bottom and kick off a strong rally. But, there are many factors I will be watching in order to make this determination, as outlined in my weekend update this past weekend.
So, while many investors are stuck in long positions since they did not recognize that the market environment was changing, we have been quite focused on the 2100-2200SPX region as a target for this long-term correction even before this correction began. And, while we may still see a corrective rally in 2019 which can take the market back to 2800+ before that downside target is met, our long-term expectations remain focused on that 2100-2200 region for this correction before we are able to set up for the next major rally in the 5th wave off the 2009 lows, with targets over 3200SPX in the coming years. And, should we see indications of bottoming in our target zone, I will probably attempt a long trade for that potential corrective rally. However you slice it, 2019 will be providing us with a lot of opportunity.
Avi Gilburt is a widely followed Elliott Wave technical analyst and founder of ElliottWaveTrader.net, a live Trading Room featuring his intraday market analysis (including emini S&P 500, metals, oil, USD & VXX), interactive member-analyst forum, and detailed library of Elliott Wave education.