Are You Blind To What's Really Going On In The Market?
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
In this article, I am going to do something a little different from my usual articles and start with my perspective on market direction, and then move into the issues I see in the market today.
I have long believed that we can see the 3000+ region before we get that 30% correction I have been looking for in the 2019-2020 time frame. And, as usually occurs, that market top will be accompanied by excessive bullishness among the masses. While many of the pundits have believed we will crash every week for years, the public seems to ignore them (appropriately) and have become much more bullish of late.
As one indication of such bullishness, the University of Michigan reported on Friday that U.S. consumer sentiment jumped more than forecast in September to a six-month high as Americans grew more optimistic about the economy and their purchasing plans. While I do not believe that this suggests that the 30% correction I am expecting will begin immediately, it certainly provides evidence that we are approaching that top.
But, for now, as long as we hold over the 2830-60SPX support region, I am expecting a rally to begin in the coming week that will take us up towards the 3000 region rather quickly. It would take a sustained break below 2800SPX to make me question my bullish thesis for the remainder of 2018.
Now, on to the market observations.
For the last year or two, I have been presenting a list of factors to those that have read my articles. This list presents many of the reasons that pundits claimed the market would begin a crash over the last three years:
Brexit – Nope
Frexit – Nope
Grexit - Nope
Italian referendum - Nope
Rise in interest rates - Nope
Cessation of QE - Nope
Terrorist attacks - Nope
Crimea – Nope
Trump – Nope
Market not trading on fundamentals – Nope
Low volatility – Nope
Record high margin debt – Nope
Hindenburg omens - Nope
Syrian missile attack - Nope
North Korea – Nope
Record hurricane damage in Houston, Florida, and Puerto Rico - Nope
Spanish referendum – Nope
Las Vegas attack - Nope
New York terrorist attack – Nope (market even rallied strongly)
Trade Wars – Nope (market has rallied 8% in the face of trade wars)
As I noted in my last article, while most people sincerely believed that the market would drop overnight due to the further trade war escalation, the market has rallied 20+ points as of my writing this on Tuesday. So, let’s stop pretending that this news is really bearish for the market.
As I also noted, the market has rallied 8% in the face of these trade wars, so there is absolutely no support to the premise that the market is dropping due to trade wars. In fact, if you believe in exogenous causation, then you must conclude that the trade wars have caused the market to rally 8% and that trade wars are good for the bull market.
Moreover, the market has rallied 50% despite all these “issues” we have encountered over the last 3+ years. So, it would seem that either the market has not read any of the articles published by these pundits letting it know that it was supposed to drop rather than rally, or maybe the market just got it wrong. (smile)
I am quite sure that most of you have read many of the articles that highlighted each of these issues to explain why they would end this bull market at the time. Yet, when the market continued higher, the pundits never went back to address why the market continued higher despite the clear reasoning they presented as to why it should not have.
However, one author in particular, who has been bearish for the last three years, noted in two of his latest articles that "2018 has been defined by U.S. stocks’ ability to rise despite international developments."
The problem is that one can say this at any point in time within the last 3 years, as the market has rallied 50% despite many “international developments.” Yet, many analysts continue to provide their latest and greatest market expectations based upon geopolitical issues. I guess Einstein was right in his assessment of insanity.
I know I harp on this issue week after week, but it needs to be constantly repeated since so many investors are blind to the realities of the market. You see, there is always going to be some news to point towards whether the market goes up or down. And when the market moves in the opposite direction than most would have expected based upon the substance of a major news event, some pundits will simply look for another news event to explain why the market moved opposite of their expectation based upon the major news event, or they simply claim “they sold the news,” or “the market is not trading based upon fundamentals at this time.”
But, most of them will simply ignore their prior expectations regarding a particular news event, as they move on to the latest and greatest reason the market is going to move in a certain direction and discuss it ad nauseum – until that, too, fails to provide the expected result.
Yet, amazingly, they hold fast to the common perspective that “the fate of markets is inextricably intertwined with the ebb and flow of geopolitics,” as they search for the next geopolitical event which will certainly cause the reaction they expect.
Eventually, the market will turn down and it may even coincide with one of these events. Shortly thereafter they will have to visit their neighborhood orthopedist after they dislocate their shoulders from their incessant patting themselves on the back for “nailing that top.”
Have I told you about my children of late?
This reminds me of when my children were 3 years old, and we were stopped at a traffic light. They look at the traffic light, and say “now,” as they try to time the light changing back to green. And, if it does not change, they again say “now.” And, this goes on for maybe another 10 to 15 times, depending on how long the light takes to change. Yet, when the light finally changes at one of their “now’s,” they proudly assume that they caught that timing ever so perfectly.
This sure sounds like most of the pundits we read and listen to, does it not? So, yes, when I read these pundits providing us reason after reason as to why the market will top, I view it as akin to my 3-year-old child saying “now.” Eventually, the market will turn just like the traffic light will eventually turn and they will react just as proudly as my 3-year-old, assuming they caught that timing ever so perfectly. But, clearly there is no prescience to their abilities to identify the cause of that turn, just like my 3-year-old.
You see, just like my 3-year-old does not comprehend that there is something internal to the traffic light that causes the light to change, the pundits do not comprehend that there is something internal to the stock market that will eventually make it turn down. This is clearly evidenced by the fact that none of the exogenous events to which they have been pointing for years have been able to cause the turn to the stock market every time they say “now.” My 3-year-old and the market pundit simply do not comprehend the true driver of that which they are attempting to time.
I want to remind you what R.N. Elliott said in his book Nature's Law 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.
I know many of you love to read about and discuss these geopolitical issues and the expected effect they will have on our markets. This is what the great majority of financial news and articles (in addition to the posted comments) address.
So, while you may enjoy engaging in this pastime of financial market debate, consider what would happen if the market came to the same conclusion posted by the author above, and actually took it to heart through an understanding of Elliott’s words?
Yes, my friends, that is the sound of silence.