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Would You Rather Be Right Or Rich?

 -- Published: Tuesday, 21 February 2017 | Print  | Disqus 

By Avi Gilburt,

I have recently written a few articles discussing my directional perspective on the S&P500. In fact, my long-term target has been 2537-2611SPX for years now. Moreover, before we entered 2016, I noted that I was looking for a rally to 2300SPX in 2016, but with the market potentially dropping to the 1800SPX region first into February, as you can see from the chart outlining our analysis for 2016.

But, I also believed that the 2300SPX region was only a way point, as I expected us to head much higher in 2017.

Now, the comments to these articles have been quite interesting. The common underlying theme seems to suggest that the fundamentals of the market have not supported this rally, and still do not support the market for being as high as it is currently. And, when I question these commenters, they are more than happy to admit that the market is simply wrong for being as high as it currently stands.

Folks, I don't know about you, but from where I come from, the market is always right and price represents the ultimate truth in the market. In fact, one of my members provided me with a wonderful analogy to drive this point home:

If a weather forecaster calls for sunshine, but instead it rains, would we then say that the forecaster was right, but the weather was wrong?

Saying that the fundamentals are right and the market is wrong is no different than our weather example.

Even those that believe fundamentals drive our market easily admit that there are many times where the fundamentals do not control, and we are now in the midst of one of those times. But, let me give you another example. Let's say a car is set up to be driven by remote control. When we place someone behind the wheel, and he turns the wheel in the direction the car is moving some of the time, do we say that the person in the driver seat is controlling the car, or is it the one with the remote control that is driving the car all the time?

What is Really Driving the Market?

The stock market is no different. We have to look at what is really driving the market all the time. To claim that the fundamentals drive the market some of the time, but not all the time, is no different than saying the fundamentals really do not control the market. And, when the market aligns with the fundamentals, then we are only dealing with a coincidental factor, rather than a driving one.

But, let's look at the fundamentalists' perspective a bit closer. They say that the fundamentals don't support the market being this high. Yet, the market is this high. Therefore, isn't it clear that fundamentals are not very good at predicting where the market is, let alone where it is going?

I believe there is growing support in this perspective:

In 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, he noted the following regarding those engaged in "fundamental" analysis for predictive purposes:

The historical data say that they cannot succeed; 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?

As Dr. Cari Bourette, of, has noted:

Maybe we should leave the fundamentals to economists and allow them to analyze the markets in their ivory towers, as they truly seem to be detached from the reality of the market. And, if you want to understand where the market is going, find a good trading tool (hint: not FA).

Now, for those that question whether sentiment is the true driver of the stock market, allow me to present to you a number of people who may sway your thinking.

Bernard Baruch, an exceptionally successful American financier and stock market speculator who lived from 1870- 1965, identified the following long ago:

All economic movements, by their very nature, are motivated by crowd psychology. Without due recognition of crowd-thinking ... our theories of economics leave much to be desired. ... It has always seemed to me that the periodic madness which afflicts mankind must reflect some deeply rooted trait in human nature - a trait akin to the force that motivates the migration of birds or the rush of lemmings to the sea ... It is a force wholly impalpable ... yet, knowledge of it is necessary to right judgments on passing events.

During his tenure as chairman of the Federal Reserve, Alan Greenspan testified many times before various committees of Congress. In front of the Joint Economic Committee, Green- span noted that markets are driven by "human psychology" and "waves of optimism and pessimism." Ultimately, as Greenspan correctly recognized, it is social mood and sentiment that moves markets.

Social experiments have actually been conducted which resulted in price patterns that mirror those found in the stock market. In 1997, the Europhysics Letters published a study conducted by Caldarelli, Marsili and Zhang, in which subjects simulated trading currencies, however, there were no exogenous factors that were involved in potentially affecting the trading pattern. Their specific goal was to observe financial market psychology "in the absence of external factors."

One of the noted findings was that the trading behavior of the participants were "very similar to that observed in the real economy," wherein the price distributions were based on Phi (.618).

Their ultimate conclusion would surprise the most avid trader today:

In spite of the simplicity of our model and of the strategies of the single participants, and the outright exclusion of economic external factors, we find a market which behaves surprisingly realistically. These results suggest that a stock market can be considered as a self-organized critical system: The system reaches dynamically an equilibrium state characterized by fluctuations of any size, without the need of any parameter fine tuning or external driving.

Marsili was quoted as saying that "the understanding that we got is that the statistics of price histories in financial markets can be understood as the result of internal interaction and not the fundamental interaction with the external world."

In August 1998, the Atlanta Journal-Constitution published an article by Tom Walker, who conducted his own study of 42 years' worth of "surprise" news events and the stock market's corresponding reactions. His conclusion, which will be surprising to most, was that it was exceptionally difficult to identify a connection between market trading and dramatic surprise news. Based upon Walker's study and conclusions, even if you had the news beforehand, you would still not be able to determine the direction of the market only based upon such news.

In a paper entitled "Large Financial Crashes," published in 1997 in Physica A., a publication of the European Physical Society, the authors, within their conclusions, present a nice summation for the overall herding phenomena within financial markets:

Stock markets are fascinating structures with analogies to what is arguably the most complex dynamical system found in natural sciences, i.e., the human mind. Instead of the usual interpretation of the Efficient Market Hypothesis in which traders extract and incorporate consciously (by their action) all information contained in market prices, we propose that the market as a whole can exhibit an "emergent" behavior not shared by any of its constituents. In other words, we have in mind the process of the emergence of intelligent behavior at a macroscopic scale that individuals at the microscopic scales have no idea of. This process has been discussed in biology for instance in the animal populations such as ant colonies or in connection with the emergence of consciousness.

In fact, one commenter to one of my articles on Seeking Alpha made the following astute point regarding how news affects these subconscious herding trends:

Compare the market to a stream of ants marching by in, generally, a single direction. Run a stick across their path and there will be some momentary confusion and reaction to the direct stimuli but very soon afterwards the original parade of ants continues and the stimulus is forgotten.

So, based upon much research, it does seem that the market may be considered to be on a path that is determined by a mass form of herding that is given direction by social mood. It sure does explain the oft asked question of why markets go up when bad news is announced or vice versa. It also takes out all the guess work in attempting to determine the next "news event" that may move markets. And, it also explains why anyone following fundamentals is still scratching their head as the market continues to rally far beyond their expectations, while they continue to claim "the market is wrong."

So, as I asked you in the title to the article, do you want to be "right," or do you want to make money?

As I have also noted many times, as long the stock market is holding over its upper support region, my expectation is that we are heading over 2500SPX by the end of the year or early next before we top out. So, if the market breaks the 2220-2240SPX region, before we strike our targets, I would clearly have to re-assess my perspective. But, that level is still far above the region our analysis told us to turn bullish back in the 1800's last year. And, as we move higher, we will clearly be moving our upper support region higher to lock in more profit. Once we reach our target region, and the patterns are suggestive of a topping market sentiment paradigm, then we will simply exit the market, and not wait for it to turn down and break support.

Avi Gilburt is a widely followed Elliott Wave technical analyst and author of (, 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.


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