I am starting to see evidence of serious stress from investors based upon the tone of the some of the comments I am seeing in my articles on the market. Well, at least from those who did not heed my warnings.
In fact, even though I warned about this type of drop well before it happened, some investors were taking their anger out on me even though the market did exactly what I warned it would do. This suggests a high amount of stress being felt by many investors after only a 10% drop off the highs. Can you imagine what it will be like if we attained the full 20-30% correction that we see as a strong potential?
I have even seen commenters begin to channel Barron Rothschild, and say that they are buying because of the blood in the streets. However, I suspect that the blood they are seeing is likely only as a result of paper cuts or knee scrapes rather than any serious injuries – at least for now. In fact, we really have not seen any real blood since 2008/09.
Yet, there is a lot of confusion about what caused this decline we experienced over the last few weeks. I think that Jeff Miller does an amazing job of outlining the pulse of the markets in his weekly “Weighing The Week Ahead,” and he noted:
Financial news continues to be very good, and financial markets are “ugly” in the terms of many veterans. The news has everyone worried, especially since there is no satisfying explanation.
When we see situations like the current one, wherein we experience a sizable decline without “satisfying explanations,” it should cause you to question your prior assumptions about what truly drives the market.
…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. If the conventional macroeconomic approach is useless even in retrospect, if it cannot explain or understand an outcome when we know what it is, has it a prayer of doing so when the goal is assessing the future?
This quote was taken from a paper written by Professor Hernan Cortes Douglas, former Luksic Scholar at Harvard University, former Deputy Research Administrator at the World Bank, and former Senior Economist at the IMF. The paper discusses those engaged in “fundamental” analysis for predictive purposes at market turns.
But, I digress. Let’s look at where we came from and where we are going, based upon our analysis of market sentiment.
When we completed the pullback in early 2018, we set our sights on an ideal target region of 3011-3225SPX, which we identified quite some time ago. And, remaining staunchly bullish for years has made our subscribers quite wealthy and happy during that time. In fact, our subscribers at ElliottWaveTrader.net are
In fact, when everyone else turned bearish in early 2016, the larger-degree market structures were pointing us over 2600SPX from the 1800SPX region. And when everyone was certain that the Trump election was going to crash the market, we continually reiterated that it made no difference who won the election, as the market was pointing over 2600SPX. And, the fact that Trump won and the market rallied to our long-term targets certainly support our perspective on the market.
You see, we do not view exogenous market factors as being quite as important as most analysts and investors do. Rather, we view market sentiment as being a much greater indication of market direction and targeting. In fact, none of the risks that caused so many to remain bearish during the 64% rally in 2016-2018 affected the rally we had expected. This certainly supports our perspective on what drives the market.
As R.N. Elliott noted almost a century ago,
At best, the news is the tardy recognition of forces that have already been at work for some time and is startling only to those unaware of the trend… kings have been assassinated, there have been wars, rumors of wars, booms, panics, bankruptcies, New Era, New Deal, “trust busting”, and all sorts of historic and emotional developments. Yet all bull markets acted in the same way, and likewise all bear markets evinced similar characteristics that controlled and measured the response of the market to any type of news as well as the extent and proportions of the component segments of the trend as a whole. These characteristics can be appraised and used to forecast future action of the market, regardless of the news… Those who regard news as the cause of market trends would probably have better luck gambling at race tracks than in relying on their ability to guess correctly the significance of outstanding news items… To sum up our view, then, the market essentially is the news…
The causes of these cyclical changes seem clearly to have their origin in the immutable natural law that governs all things, including the various moods of human behavior. Causes, therefore, tend to become relatively unimportant in the long term progress of the cycle. This fundamental law cannot be subverted or set aside by statutes or restrictions. Current news and political developments are of only incidental importance, soon forgotten; their presumed influence on market trends is not as weighty as is commonly believed.
R. N. Elliott, Nature’s Law, 1946
So, despite Brexit, Grexit, terrorist attacks, rising interest rates, North Korea, Trump, cessation of quantitative easing, quantitative tightening, trade wars (our last 9% rally in the market began after the trade wars began), etc., Elliott’s words rang resoundingly in our ears, and the market told us it was still going much higher.
However, in September, the market structure was providing us some concern. The overlapping nature of the rally which should have ideally pointed us as high as 3225SPX began to suggest that the likelihood of attaining such lofty levels had significantly decreased.
This led me to begin warning subscribers in mid-September that a breakdown below 2880SPX could be all she wrote for wave 3 off the 2009 lows. While my primary expectation on a break of 2880SPX was that we would drop quite quickly to the 2790SPX region (which may still allow us to see that 3011 region in a very risky pattern), I noted that should we see a sustained break of 2770SPX from that point, it will suggest that wave 3 off the 2009 lows has likely ended, and that we will be heading down to the target we set earlier this year for the a-wave of wave 4 in the 2500-2600SPX region. And, yes, we even set the downside target for this initial move off the highs well before we broke down.
So, while the news of the day or the fundamentals did not prepare us for this recent market decline, the structure of the market not only provided us early warning that this would happen; it even provided us with the downside targets we would strike.
Therefore, I suggest that you at least emotionally prepare for the potential of a bigger leg down in the coming months. And, yes, my ideal target is still the 2200 region. But, it will not likely be a direct path, as we will need a rally to make everyone feel bullish again, and assume the worst is over.
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.