Sentiment speaks: the most important news you likely missed last week
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
When I read most articles written in the financial media, they all seem to have a common thread running through them: They all tell you what has happened in the past and they try to come up with reasons as to why it happened. And, interestingly, many cannot even agree as to the reasons for what has happened in the past. Now, consider how many can consistently and accurately give you prognostications about the future if they cannot even agree about the past?
If you have read my articles in the past, you would know that I advise investors to ignore the news for market direction cues. Rather, I urge a focus on price, as it tells you all you need to know about the market if you know how to read what the market is telling you through price. Moreover, I give you parameters as to how to deal with the future. Consider how many others on Seeking Alpha will provide you specific targets on the upside and downside as do we, and we hit those targets often and quite consistently as well.
As far as news is concerned, I do view news as potentially acting as a catalyst for a market move. However, the substance of the news will not be indicative of the direction of the market move. That is why we often see markets move up on bad news, and down on good news. And, simply for this advice alone, my members have been forever grateful, as it gets them to focus on what is important, as this member recently noted:
"Fibonacci Pinball has been a revelation to me. Until I signed up for EWT, I was continually trying to make sense of the news and other analysts - an impossible task at best! My membership here has been way more than worth it. Now I cannot fathom how anyone can consistently make money in the market without first having Avi and his crew show you the principles of Elliott wave analysis combined with Fib Pinball. It has totally changed my perspective on investing and trading for the better.”
I am sure that you are now questioning the title of my article. Well, there was one piece of news that was likely missed by most market participants, and it was one of the most important pieces of news. The reason I think it was missed by most is because there were only 2 comments to this article (one of which was mine), and only 5 "likes.” And, to be honest, the information in the article actually surprised me quite a bit.
In his article this past week, Charles Rotblut provided us with what I think is shocking news. The American Association of Individual Investors Survey registered only 24.7% of investors surveyed that expected stocks prices to rise in the coming six months.
"Bullish sentiment, expectations that stock prices will rise over the next six months, decreased by 7.2 percentage points to 24.7%. The drop puts optimism at unusually low level (below 27.9%) for the 10th time out of the last 13 weeks. Bullish sentiment levels are also below the historical average of 38.0% for the 20th consecutive week.
Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, pulled back by 6.7 percentage points to 33.9%. Even with the decline, this is the third consecutive week that neutral sentiment is above its historical average of 31.5%. The decrease follows last week’s neutral sentiment reading that was the highest since the week of January 1, 2020.
Bearish sentiment, expectations that stock prices will fall over the next six months, jumped by 13.8% percentage points to 41.4%. The increase puts pessimism at an unusually high level (above 40.1%) for the ninth time out of the last 12 weeks. Bearish sentiment is also above its historical average of 30.5% for the 19th time out of the last 20 weeks.”
This is likely the most significant news that came out this past week, and most investors likely did not even know it. You see, when the boat gets tilted a bit too much on one side, well, we all know what happens. And, it seems that the bears are seriously tipping the boat.
While I do not rely often upon the AAII survey, as I do not see a huge amount of value most of the time, the times to really take note are when it is flashing an extreme sign. And, I believe we are seeing an extreme sign.
As Mr. Rotblut also appropriately noted:
"Historically, the S&P 500 index has gone on to realize above-average and above-median returns during the six- and 12-month periods following unusually low readings for bullish sentiment and for the bull-bear spread. (This week’s bull-bear spread of –16.7% is unusually low too.) Unusually high bearish sentiment readings historically have also been followed by above-average and above-median six-month returns in the S&P 500.”
Also within his article, he outlined the reasons cited by investors as to why they did not expect a bullish resolution to the current market conditions. And, if you would read the article, you would see the usual suspects that we have all been hearing about of late: Russia, inflation, supply shocks, earnings expectations, etc.
But, consider whether this is worse than the economic shutdowns, high Covid deaths, record unemployment, economists declaring us to be in recession, earnings estimates being slashed that we experienced at the bottom of the market in March of 2020, right before the S&P 500 went on a parabolic 1000+ point rally. To be honest, we really do not even have to make a comparison. The point is that the significant majority of the market is not bullish, and they clearly have reasons to be so.
As for me, I really do not pay much heed to these factors. I simply want to know what the market is telling me through price. And, for me, this is really simple now. As long as we are able to hold over the 4400SPX region, then I expect a rally to the 4700SPX as we look out into the early spring. Should we see such a move in the S&P500 then I become very, very bullish for the last half of 2022.
You see, a move to 4700SPX would complete 5-waves up off the February 24th low, and tell me that the market is setting up to break out later this summer or early in the fall on our way to my next major target in the 5500SPX region. But, before that happens, we will see a period of volatility in the summer that can take us back down to the 4300SPX region before we set the stage for the next break out.
Many of you are scratching your heads now and asking yourself how this is even possible with all the negative news abound? Well, again, I will ask you what did you think when I said that the market was going to bottom in the 2200SPX region and rally to 4000+ during the news of the highest Covid deaths being reported, economic shutdowns being seen all over the country, record unemployment, recession proclamations by the economists, etc.? Was it any less crazy then to entertain such an expectation?
Is this any different than when I was looking for the market to begin a strong rally in late February, and then the market began a 500-point (10%) rally on the exact day that Russia invaded Ukraine? In fact, my target was 4650SPX, and we recently topped out at 4637SPX. That was when I warned the members of ElliottWaveTrader that it was time to head to the sidelines and let the bears and bulls fight it out, as I expected us to drop back to at least the 4440-60SPX region.
Is this any different than when I was calling for a major top in gold in 2011 at the $1,915 level when everyone was so certain that we were about to break out over $2,000 – with the market topping at $1,921?
Is this any different than when I was calling for a major bottom in the gold market in late December 2015 when everyone was so certain that gold was going to break down below $1,000 – with gold bottoming at $1,050?
And, I can go through dozens more examples with the S&P500, the US Dollar, metals, oil, bonds, etc. The point is that when the market reaches a bullish or bearish extreme, it is often time to begin to look in the other direction. This is the simple way that the market works the great majority of the time. If you want to understand this better, feel free to read the 3-part series I recently wrote outlining my views on how to approach the market:
Sentiment Speaks: What If They Held A Recession And No One Showed Up? - Part I
Sentiment Speaks: What If They Held A Recession And No One Showed Up? - Part II
Sentiment Speaks: What If They Held A Recession And No One Showed Up? - Part III
But, I want to be very clear about my near term expectation. We must hold the 4400SPX region of support and see a higher high in the coming weeks in order for me to maintain a strong bullish expectation for much higher highs in the 2nd half of 2022. If we see a sustained break of 4400SPX in the coming weeks instead, then the door opens to revisit the 4000SPX region again before any bullish set up may develop again.
Over the years, many (even other contributors on Seeking Alpha) have called my analysis things like "voodoo” or "chart magic” or "intellectual hucksterism.” Most people make fun of that which they do not understand. And, it is often likely an issue of ego on their part. You see, many of these people are thinking to themselves that if they cannot understand something then it must not be true. Yet, those that have maintained an open mind and have come to us to learn our methodology have positively transformed their performance in the market. This is why these are some of the most common comments I hear from members:
"I have been following you for many years, and I finally decided to join your service. I can only say that I wish I joined long ago.”
"I wish now that I hadn't ignored EWT for so long. I stupidly believed those who claimed there were no real rules to the counts, and there was therefore no predictive value there. So wrong . . . Thanks to Avi and team!!!! "
In fact, I have even "converted” other Seeking Alpha contributors to seeing the market from a sentiment-driven viewpoint. A little over two weeks ago, I had a member gathering in Israel. One of the members that attended was a contributor at Seeking Alpha who, in the early days of Seeking Alpha, was ranked as high as #7 overall most popular, right up there with John Mauldin and Tyler Durden. He noted to me that I completely changed how he looked at the markets and he finally understood what he had been missing for years.
This past week, another contributor posted this on my blog post:
"Avi and I have thrown some punches in the comment section of his article on debt. I still think he is wrong there. That said, he is uncannily accurate in his market calls. I have been watching on the EWT site, and he is nailing it. Way before it happens. You would be wise to follow his market calls. Just don't buy his macro debt calls. (just a little jab Avi. Great job navigating the twist and turns. When you have an adversary on your debt article like me being a huge advocate for your market analysis, you are doing something right!)”
I am not going to stand here and tell you that I know it all or that I will be able to tell you what will certainly happen in the market. Rather, we provide our perspective by ranking probabilistic market movements based upon the structure of the market price action, which tracks market sentiment. And, if we maintain a certain primary perspective as to how the market will move next, and the market breaks that pattern, it clearly tells us that we were wrong in our initial assessment.
Our successful market guidance throughout the last decade is the main reason we have grown to almost 9000 members in all our services (with 1000 money manager clients), and have 3 services in the top 16 within the Seeking Alpha Marketplace out of a total 185 services. When you consider that our services are based upon Elliott Wave analysis, it highlights our accomplishment on a fundamental analysis website.
But here is the most important part of the analysis: We also provide you with an 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 happens.
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.
Again, while I will never be able to tell you with certainty how the market will move in the coming weeks, months, and years, I present you with enough information to know where my primary perspective is wrong so that you can adjust in order to take account for the alternative situation. And, until such time that the market proves our primary perspective is wrong, we will continue to follow our primary perspective, which has been guiding us extraordinarily well for many years.
By now, I hope you recognize the difference in our analysis approach, other than the accuracy thereof. We strive to view the market, and utilize our mathematically based methodology, in the most objective and intellectually honest fashion as possible, no matter how crazy it may sound. 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. So, you will never hear from me that "the market got it wrong.”