In my last article, I outlined how the same news event can “cause” the market to rally 9% at one time, and drop 5% another time. And, then I noted how I am quite certain there will be some of you that will try to explain away this clear lack of consistency with some form of convoluted “logic.”
And, true to form, some of you did. One such commenter noted:
For about eight months, the market stupidly rose in spite of the China trade war because it was in denial. . . I said, the market would fall. The longer the denial continued and the more the market rose, the harder it would fall when it FINALLY realized that China is NOT going to capitulate.
This same commenter went on to then contradict himself:
The market is not falling because of the China trade deal. It is falling for numerous reasons, particularly the Fed's continued tightening.
This begs many questions. Which is the “correct” narrative? Do we have to guess? Is there any way we can really know? How can we objectively test which is the correct narrative? Could both narratives be wrong? Could both narratives be right? How do I use this information prospectively rather than trying to fit it retroactively?
After you answer those questions (and I truly wish you luck in your attempt), let me try to get something else straight. When the market did not react as the commenter expected it would, he concluded that either the market is wrong or it is stupid? Is that the way one should be analyzing the market? I mean, do people really think that if the market does not do what they believe is reasonable or right, then it is stupid or wrong? Do you think that is wise if your goal is to align your investment account with the market in order to grow your account? I can assure you that simply calling the market a name when it moves opposite of your expectation will not help grow your investment account.
Let’s even look at his “alternative” reason as to why the market is falling. Supposedly it has to do with the Fed. But, riddle me this Batman: when the Fed came out and noted that it will have to consider a rate cut, why did bonds drop? Do rate cuts normally cause bonds to rally or drop?
As human beings we seek reasons for what we see happening. It makes us feel as though we are in control. (If you need me to tell you that we are not in control, then we have bigger fish to fry beyond financial markets). And, most often, the simple minded seek very superficial reasons. If they can view a simple correlation as causative, then their analysis is done.
For example, if a news event coincides with a market move, then it is “clear” that the market move was caused by the news event. So, obviously, bonds dropped when the Fed began discussing rate cuts. Obviously, the China trade war caused the market to decline in 2019, whereas it caused the market to rally in 2018. Right?
Folks, at some point, you are going to have to be honest with yourselves. The other side of this coin was presented by the commenter above. And, Ben Franklin provided us a very wise perspective when it comes to human nature and our ability to fool ourselves:
So convenient a thing is it is to be a reasonable creature, since it enables one to find or to make a reason for everything one has a mind to do.
However, if your sole focus is price, and price is truth, you have no need to come up with artificial narratives to explain what the market did in hindsight. And, when that same explanation gets turned on its head when a similar situation arises, yet the market reacts in the opposite manner, well, then we are left with the dishonest perspective that the market is either wrong or stupid. Calling the market names when it does not react as we expect will never be beneficial for your investment account.
And, if you have to resolve yourself to believing the market is wrong or stupid, then I will offer you a quote from Thomas Tusser for you to ponder:
“A fool and his money are soon parted.”
Several weeks ago, I highlighted a set up for a stock market “crash.” I outlined the parameters and then updated those parameters in follow up articles. In my last article, I noted that the next test for the market is in the 2720-35SPX region, and it had to strongly break that region early this week to allow the next stronger phase of the decline, the heart of the crash if you will, to take hold.
I then provided further instructions regarding the goal posts I highlight:
if the market is unable to do so, and rallies back through the market pivot (2770-2800) we outlined to our members, then it tell us that the immediate crash set up has been postponed, and the market will see another higher retracement before we see another downside set up take hold in the coming weeks/months.
And, as you can now see, the market held that noted support, and rallied back through resistance. This has now given us a much more complex structure for the coming weeks/months, but it has not likely prevented us from seeing lower levels in the coming weeks/months.
But, please take note that there is nothing in my analysis regarding a narrative about what moves markets. Nor do I call the market stupid or wrong for taking the alternative path I was tracking. Rather, I outline the parameters of the market as I see them, and then it is my job to assess – in real time – what the market will choose, and then act accordingly. Moreover, the market is not stupid or wrong for making the choice it has. Rather, I would be stupid or wrong for attempting to fight the ultimate truth of the market represented in the price action.
So, I am left with the next week or so seeing the market setting up a more complex downside structure. Nothing has changed my expectation that lower levels will likely be seen in the coming weeks/months. But, the question is whether the next downside action I expect in the coming weeks will be “crash-like,” or if it will be more of a grinding up/down action as we make our way to lower levels. The answer to that question I do not yet have.
As for me, I will not be posting an update this weekend, as it is a Jewish Holiday through Monday night. I will be spending this holiday with my wife in Idaho, until she is cleared by the doctor for flying home. So, I want to wish all of you who are celebrating this weekend a Gut Yom Tov. And, again, I want to thank everyone for their prayers and well wishes, as it seems it has helped to spur a miraculous recovery for my wife. Thank you from the bottom of my heart.
Avi Gilburt is a widely followed Elliott Wave analyst and founder of ElliottWaveTrader.net, a live trading room featuring his analysis on the S&P 500, precious metals, oil & USD, plus a team of analysts covering a range of other markets. He recently founded FATRADER.com, a live forum featuring some of the top fundamental analysts online today to showcase research and elevate discussion for traders & investors interested in fundamental rather than technical analysis.