Image via Burak Su/Wiki Commons
Every week the market provides us another example of the intellectual dishonesty in believing the substance of any news event was the “cause” of a market move. And, if you cannot yet see that on your own, I will explain it a bit further below.
While everyone has been so concerned about the evil trade wars that were supposedly going to topple the US markets, we have been rallying in the face of this latest evil. In doing so, the market provided us with yet another reason it was supposed to have tanked, but, instead, continued to rally. We can add this to Brexit, Grexit, terrorist attacks, rising interest rates, North Korea, Trump, cessation of quantitative easing, and the myriad of other reasons the market was supposed to crash and burn over the last 3 years as we have rallied strongly.
But, let’s just ignore all of that, and do what all the other investors and pundits do. Let’s just ignore all these instances of failed attempts to glean market direction based upon the geopolitics or fundamentals, and move onto the next news item which will “certainly” cause the market to decline precipitously. Yes, my friends, it is time to talk about how the events in Turkey are certainly going to cause our next crash. Sigh.
I am simply amazed when I read analysis that claims, with absolute certainty, that Turkey caused the 20-point pullback we experienced in the S&P500 on Friday . In fact, I just read an article by another author who spent several paragraphs patting himself on the back after being bearish the US markets for the last 3 years. Who needs fiction when reality is this surreal.
So, allow me to put this as simply as possible so everyone can understand how foolish this situation is.
First, you need to learn that correlation is not the same as causation. Just because there was a negative Turkish event on Friday which coincided with a 20-point drop in the SPX does not mean it was the cause of the drop in SPX. In fact, I prepared the members of my service for this pullback, and I clearly did not know what the news was going to be. Nor did it really matter to me.
Second, not only do you need to understand correlation is not akin to causation, has anyone ever considered looking at what happened the last time we had a serious negative event in Turkey? Do you know what the S&P500 did at that time?
Well, the last time we experienced a negative Turkish event was back in July 2016 when there was an attempted overthrow of the Turkish government. Arguably, that was a significantly more serious geopolitical event than what was experienced on Friday . Yet, the S&P500 rallied over 20 points upon news of that event in 2016. Yup, you heard me right. The S&P500 rallied over 20 points on that news. So, should we have said that negative Turkish geopolitical news was good for US markets then?
If you are being intellectually honest with yourself then you must come to the conclusion that trying to glean market movements from these types of geopolitical events is nothing better than a coin toss. And, if you have not learned that lesson from the last three years already, then you are clearly not paying attention.
Third, the S&P500 dropped 20 points on Friday . I mean, really? We are barely over 1% off the all-time highs in the S&P500 and these authors are writing obituaries for the US markets. You would think we are in the middle of a 30% correction already the way many of them are going on and on.
So, allow me to give you my general guideposts for the coming weeks in the SPX. First, main support resides between 2730-2750SPX. As long as we hold over that support, this market is heading to 2935-2965SPX in the coming month or two. Ultimately, I still see nothing that would make me reconsider my expectation that this market is heading over 3000 before a major correction begins.
Second, I still think this market is heading to at least the 3011 region before we begin the 20-30% correction I expect for 2019. If we were to see a meaningful break below 2730SPX, I may have to reconsider if we have begun that correction sooner rather than later.
Since I recognize that markets are non-linear in nature, I have provided you the guideposts I use (along with my targets), as generated by my non-linear analysis methodology. If you need further details, you can always join my service. And, if you want certainty, I suggest you take all your money out of the market, as it does not exist. Rather, you need to approach the market from a perspective of probabilities, while knowing what information matters and what does not. And, geopolitical events have clearly been information that does NOT matter if your goal is to understand the direction of our financial markets.
See charts illustrating the wave counts on the S&P 500.
Avi Gilburt is a widely followed Elliott Wave technical analyst and founder of ElliottWaveTrader.net (www.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.