Sentiment speaks: I 'believe' we rally into a June swoon
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
It is now approaching almost a decade since I began writing public articles outlining my analysis in various markets. And, I have learned a lot about the general investor community based upon many of the comments I have received during that time.
One of the things that I find quite pervasive is the drive for "common-think." But, even that is a misleading classification. You see, I do not believe investors think anymore.
Rather, I see investors often grab onto something they read or hear in the media, and take personal "ownership" over that idea because it resonates with them for whatever reason. It then becomes the basis for their entire view of the market, and they seek articles which provide confirmation to their bias, and argue with articles that do not. So, rather than seeking out the truth in the market and continually testing their perspective in an objective fashion, most investors simply adopt a personal opinion and ignore or attack anything that disagrees with that opinion. Therefore, truth and profit in investing no longer seem to be the ultimate goal.
I know I personally deal with this issue often, as many commenters would rather attack my methodology since it does not jive with their personal perspective in the market, rather than recognizing how accurate our analysis has been with regard to the market action, and how wrong many of their strongly held beliefs have been. In fact, profit seems to have taken a back seat to "belief" today.
In this article, I am going to address the many erroneous beliefs held by investors when it comes to Elliott Wave analysis, as well as the wrongly held beliefs in the market which have prevented many from maintaining on the correct side of the market. Let's begin our discussion with the issues surrounding Elliott Wave analysis.
When it comes to Elliott Wave analysis, the most commonly and wrongfully held belief is that "I have followed XXXX analyst who uses Elliott Wave analysis for years, and they were so wrong so often that I have come to the conclusion that Elliott Wave simply does not work." The related belief is that "it just makes no sense since it does not provide definitive guidance so the analyst can always be right."
I want to now point out how thoughtless and shallow these views are in practice.
"Most Elliott Wave analysis I read is wrong"
Let's assume that XXX analyst has been wrong for some time about their market expectations. So, my question to you is if that means the methodology they use is faulty or could it be that the analyst was in error in their application of the methodology?
In truth, you will never know the answer to that question unless you actually understand the methodology they utilize. In fact, how can one opine about how well a methodology works if they do not truly understand the methodology? Yet, most are so quick to throw the baby out with the bathwater that they simply discard the methodology as unworkable rather than understanding that the analyst's faulty use of the methodology is often the cause of the error.
Let's take this one step further to highlight how investors' beliefs drive this conclusion.
Let's assume that XXXX analyst uses fundamental analysis as their primary methodology. And, let's say this same analyst is wrong a lot more than they are right. Now, do you really think that investors are going to assume that fundamental analysis should be discarded simply because this analyst is often wrong? Of course not. Most investors believe in and understand fundamental analysis, and will never accept that the methodology is faulty, but rather that the analyst was wrong in their specific application.
Yet, this is exactly the challenge I face daily with regard to the general perceptions of Elliott Wave analysis, especially since most investors and analysts do not appropriately understand or apply it.
You see, Elliott Wave analysis is a difficult methodology. Even those that claim they apply it do not do so in an objective and accurate manner. Rather, most will look at a chart after having already developed a pre-conceived bias about market direction, and will then retro-fit their Elliott Wave analysis to support their bias.
In fact, more often than not, their original bias was derived through the use of a fundamental analysis. I call this "wave-slapping:" slapping Elliott Wave numbers and letters onto a chart based upon a bias or look. Unfortunately, this classification fits the great majority of what is presented as Elliott Wave analysis today.
I have written about this in the past, and you may want to read about it here:
And, you will not pick up on this nuance unless you really understand Elliott Wave analysis. Unfortunately, most are willing to simply toss it aside as unworkable, when, in fact, the fundamental analysis upon which the bias of the analyst was developed was truly at fault in most cases.
Are you ready to throw out fundamental analysis based upon this "logic?" Yet, most are so quick to throw out Elliott Wave analysis based upon this same "logic."
"Elliott Wave analysis calls the market both ways"
Then there is a related argument that "it just makes no sense since it does not provide definitive guidance so the analyst can always be right." Again, this is simply based upon a lack of understanding as to how Elliott Wave analysis works. I have addressed this argument many times before, but I think it is worthwhile to address it one more time.
First, one has to ask themselves if any methodology will provide "definitive" guidance in the financial markets? Remember, we deal with a non-linear environment, and need to apply a non-linear methodology to obtain the greatest success within such an environment.
Elliott Wave analysis is a non-linear methodology which ranks probabilistic market movements based upon the structure of the market price action, and its goal is to track the strongest drivers of our markets - fear and greed, or, as we generally refer to it - market sentiment.
But, not only does our analysis provide a primary perspective, which turns out to be correct approximately 70% of the time, we have objective parameters to tell us early on if our primary perspective is wrong so that we can adjust our positioning quite quickly. In fact, we provide you with that alternative perspective at the same time we provide you with our primary expectation, and let you know when to adopt that alternative perspective before it even happens. I know of no other methodology that can provide this type of objective analysis as part of its standard procedure.
As I have said many times before, this is no different than if an army general were to draw up his primary battle plans, and, at the same time, also draws up a contingency plan in the event that his initial battle plans do not work in his favor. It is simply the manner in which the general prepares for battle. We prepare for market battle in the same manner.
After writing publicly for almost a decade, many of the 60,000 followers we have on Seeking Alpha recognize the difference in our analysis approach, beyond the accuracy thereof. We strive to view the market, and utilize our mathematically based methodology, in the most objective fashion possible, even if it is counter to the generally held "beliefs." Moreover, it provides us with objective levels for targets and invalidation. So, when we are wrong in the minority of circumstances, we are able to adjust our course rather quickly, rather than fighting the market like many others you may read.
"Most cannot outperform the market"
Another argument I have heard recently is that since most cannot outperform the market, why bother with Elliott Wave analysis? Well, let's again consider this argument carefully.
Most money managers utilize fundamental analysis when managing money but are unable to outperform the market. Should we now assume that fundamental analysis should be thrown out completely since those that use it most are unable to outperform the stock market? I bet not a single one of you even considered such an argument, but it is the logical conclusion one must draw based upon this premise.
In truth, Elliott Wave analysis is not going to provide you with perfection in the market. We deal within a non-linear environment and it is impossible to be right all the time regarding changes in market direction. But, as I noted above, Elliott Wave analysis is a mathematically based methodology which ranks probabilistic market movements based upon the structure of the market price action, and its goal is to track the strongest driver of our markets - fear and greed. So, in effect, it is a non-linear methodology which will reasonably outperform methodologies based upon linear perspectives.
And, if you don't think that there are money managers which are able to outperform the market based upon Elliott Wave guidelines, think again. Paul Tudor Jones is probably the most famous of money managers that utilizes Elliott Wave analysis, and has stated:
Elliott Wave theory allows one to create incredibly favorable risk/reward opportunities. That is the same reason I attribute a lot of my own success to the Elliott Wave approach.
Moreover, I have almost 1000 money manager clients who all pretty much agree in their "sentiment" about our work, and these are just a representative sample:
'I am very impressed by one technical Elliott Wave analyst - Avi Gilburt' (Willem Middelkoop, Founder-Commodity Discovery Fund)
'Avi, you are the best strategist that I follow and you have made more prescient calls than anyone on the street. . . .I have been a licensed financial advisor for over a decade and worked at a number of Fortune 500 companies in my career, including USBank, Morgan Stanley, Russell Investment and now I am a director at Lincoln Financial and I can tell you that none of the so called experts have virtually an ability to determine market direction. With your insight, I have made a killing and am basing my strategies around your advice. Keep up the good work and ignore the naysayers who are missing out on your sage advice!' (Blue Chip Investing)
'I see the best quants, strategists and technicians the street has and you and your group are amongst the absolute best. My trading desk is floored at turning levels you are able to provide.' (slu)
'No single thing (or even the summation of multiple other things) has enabled me to successfully manage portfolios and, perhaps more importantly, given me so much peace of mind w/ regard to the state of the market than this site and the incredible group of analysts and support team here. Thanks for all you guys do.' (Gatortrader)
Let's now move into the current erroneous "beliefs" held by most investors about today's market.
"Inflation is going to kill the stock market"
While more and more opinion pieces are being presented in the written and television media about how inflation is about to kill our stock market, I will tell you that I am quite unconcerned about the common refrains from the peanut gallery.
In my humble opinion, this is a bull market which likely has much further to run in the coming year or two. And, I base my perspective on my objective, mathematically derived Elliott Wave analysis. I stated it quite confidently when we were bottoming at 2200SPX in March of 2020, and I still stand by my expectation - at least until the market tells me otherwise.
You see, one of the major benefits that is derived through a solidly objective Elliott Wave analysis is that it provides context to the market like no other methodology of which I know. It is the reason I was confidently able to state that the market will rally off the 2200SPX long-term support region to 4000+, with an ideal target in the 6000SPX region. And, I reiterated it at a time of extreme fear in the market in March of 2020. Yet, many continue to doubt our ability to identify these turning points in the market simply because they cannot understand it and it does not fit into their "beliefs:"
Coming from someone who still thinks the bull market of January is alive enough to carry us to 4,000, that's highly unmeaningful... Here is the 2200 exactly that you said the S&P would bottom at before taking the trip back up to 4,000... What do you want to bet the ECONOMY is going to pull it down a lot further and that 4,000 is a lot further away than your charts ever said... my own resolution is that this market has a lot further to fall because it is now following the economy, which it long divorced itself from; ... So, you have that common sense view, or you can believe Avi's chart magic will get you through all of that and is right about a big bounce off of 2200 all the way back up to 4,000.
Well, not only did the market bottom at 2192SPX in March of 2020, here we stand today at 4200SPX, all of which was outlined by our "chart magic" during a time of extreme fear gripping the market, even though the "common sense" belief was completely opposite - and wrong. Moreover, I think we will likely see higher levels to come.
Now, that does not mean I will always be right in my assessment? While our members track us at approximately 70% accuracy in our analysis, it means we will be wrong in our assessments 30% of the time. And, my last public article on my short-term expectation in the SPX was clearly incorrect, and was our first "miss" in quite some time. But, as I said, it is simply impossible for me to be right 100% of the time.
The difference in our analysis is that we provide the objective price levels which are the triggers for the analysis. It is really that simple. And, this is in contrast to all the other articles you likely read which continue to warn you about the common "belief" that inflation is the boogie man that is about to kill our stock market:
'It keeps pounding its head against that barrier but not really busting through, because inflation concerns keep grabbing its butt like a junkyard dog pulling someone down off the fence he's trying to scale.'
'As this 'liquidity vs. inflation' issue becomes clearer to the public, I believe it may catalyze catastrophic losses for the entire stock market as the fuel which has driven this bubble quickly runs dry. Looking at the hard data, historical precedents for fair-value suggest that major market indices could easily decline 50% or more.'
Do either of these authors sound like they are providing objective analysis - with clear price guidelines - upon which one can act in a low-risk manner? In fact, these types of allegories and fear mongering are quite common in most of the articles we read today.
Folks, life is tough enough. Why do we want to make our investing much tougher by guessing as to what the market does and does not care about based upon our "beliefs?" The media does this all the time when they try to relate some news of the day causing a market move. But, do we really know what the market really cares about?
How often do we see a reason cited by the news media as causing a rally in the market on one day, and only days later the same reason supposedly causing the market to drop? Why don't we want to make it easier by simply abiding by what the market tells us through price, as price is the ultimate truth in the market?
And, as you have seen in many recent articles, even the belief in inflation has two differing schools of thought. Some believe it will push asset prices higher, and others believe it will cause the stock market prices to come down significantly.
Personally, I don't care about either camp. Moreover, I don't care about "beliefs." I simply care what the stock market tells me objectively through price.
"Sell in May and go away"
Another "belief" we have heard a lot about of late is the Sell-In-May-And-Go-Away refrain. Keep in mind that this refrain suggests you sell in May and not return to the market until November. If you did so last year, you lost a 16% potential gain. I think we may see something similar in 2021, but I think we will see one more buying opportunity this summer before we rally into the fall to my minimum target of 4600SPX for 2021.
Consider that this refrain is based upon a very linear perspective about a non-linear market. Moreover, it is much more important to understand the context of the market rather than this timing refrain. In other words, are we within a bullish trend with much higher likely to go, or are we topping out with a larger pullback to be expected? If we are in the former market environment, then the result will likely be more akin to what was experienced in 2020.
I personally think the market is telling us we are still very much in a bullish trend. But, there is going to be a bit of volatility in the coming months within that bullish trend.
For now, I am still looking for the market to rally up to the 4350-4440SPX region. Upper support is now at 4115-4150SPX, with lower support down in the 4000SPX region. And, the manner in which we rally over the coming month will tell me where the ideal target resides within that next target region.
However, once that rally completes, I think we will see another pullback, which we may want to now consider as a "June Swoon." How long that swoon will last is something of which I am not yet certain, but I highly doubt it is going to last until November. Rather, the higher probability suggests that after that bout of weakness from the 4350+ region, we will likely continue to rally into the fall time-frame and attack the 4600SPX region I am still expecting to be struck in 2021.
As an investor, you have the task and responsibility of maintaining on the correct side of the market trend. Moreover, you should always be challenging your "beliefs" about the market based upon objective factors rather than emotional, superficial or amorphous ones.
How well have you fared over the last two years in this regard based upon your "beliefs?" If your answer is not positive, well, then maybe you should consider learning about our "chart magic," and you may find that it is much more objective and accurate than the alternative "common sense" belief.