Sentiment speaks: Have we begun a 20-year bear market already?
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
Every week that I publish an article on the stock market, I attempt to show you some very glaring issues as to how the market presented to you by analysts and news reporters alike. Most of them will look at the market action, review the news, and then attribute a move in the market based upon a recent news event or economic report. And, if you read it carefully, some of it does not even make sense. Let me show you an example that I read this past week:
"Hong Kong stocks up 3% in Asia session as private survey shows China's factory activity contracted" – CNBC (The headline was changed by CNBC since originally published)
Read that very carefully. Then ask yourself if a contraction in factory activity is a "bullish" indication? Then it must lead you to the question as to how can the market rally in the face of such bearish news? Well, obviously, the market does not really care, does it?
For those of you that were trading or watching the market action on Friday (even starting before the employment numbers were announced), we experienced quite a wild market day. And, I am sure that if you watched the news, you probably saw this throughout the day, depending upon whether the market was up or down at the time:
8:45 AM - "The market declined this morning due to the employment numbers"
10 AM – "The market rallied after the employment numbers were released"
NOON - "Employment outlook causes market to decline"
3:30 PM – "Market rallies after the release of latest employment numbers"
And if you think I am joking, please review the news reports throughout the day on Friday. Yet, so many of you still try to follow the news or economic reports to glean market direction.
I have written this many times in the past, and I feel it is important to repost this again:
"Until the times of R.N. Elliott, the world applied the Newtonian laws of physics as the analysis tool for the stock markets. Basically, these laws provide that movement in the universe is caused by outside forces. Newton formulated these laws of external causality into his three laws of motion: 1 – a body at rest remains at rest unless acted upon by an external force; 2 – a body in motion remains in motion in a straight line unless acted upon by an external force; and 3 – for every action, there is an equal and opposite reaction.
However, as Einstein stated: "During the second half of the nineteenth century new and revolutionary ideas were introduced into physics; they opened the way to a new philosophical view, differing from the mechanical one."
However, even though physics has moved away from the Newtonian viewpoint, financial market analysis has not.
"Many services and financial commentators in newspapers persist in discussing current events as causes of advances and declines. They have available the daily news and market behavior. It is therefore a simple matter to fit one to the other. When news is absent and the market fluctuates, they say its behavior is "technical." . . . Every now and then, some important event occurs. If London declines and New York advances, or vice versa, the commentators are befuddled. Mr. Bernard Baruch recently said that prosperity will be with us for several years "regardless of what is done or not done." . . . In the dark ages, the world was supposed to be flat. We persist in perpetuating similar delusions." (R. N. Elliott)
External events affect the markets only insofar as they are interpreted by the market participants. Yet, such interpretation has been guided by the prevalent social mood. Therefore, the important factor to understand is not the social events itself, but, rather, the underlying social mood which will provide the "spin" to an understanding of that external event."
Studies have even been conducted which further outline how useless it is to follow news or economic reports to glean market direction:
In a 1988 study conducted by Cutler, Poterba, and Summers entitled "What Moves Stock Prices," they reviewed stock market price action after major economic or other type of news (including major political events) in order to develop a model through which one would be able to predict market moves RETROSPECTIVELY. Yes, you heard me right. They were not even at the stage yet of developing a prospective prediction model.
However, the study concluded that "[m]acroeconomic news . . . explains only about one fifth of the movements in stock market prices." In fact, they even noted that "many of the largest market movements in recent years have occurred on days when there were no major news events." They also concluded that "[t]here is surprisingly small effect [from] big news [of] political developments . . . and international events." They also suggest that:
"The relatively small market responses to such news, along with evidence that large market moves often occur on days without any identifiable major news releases casts doubt on the view that stock price movements are fully explicable by news. . . "
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 2008, another study was conducted, in which they reviewed more than 90,000 news items relevant to hundreds of stocks over a two-year period. They concluded that large movements in the stocks were NOT linked to any news items:
"Most such jumps weren’t directly associated with any news at all, and most news items didn’t cause any jumps."
As Robert Prechter appropriately noted in his seminal book The Socionomic Theory of Finance (which I strongly recommend for each and every investor):
"Observers’ job, as they see it, is simply to identify which external events caused whatever price changes occur. When news seems to coincide sensibly with market movement, they presume a causal relationship. When news doesn’t fit, they attempt to devise a cause-and-effect structure to make it fit. When they cannot even devise a plausible way to twist the news into justifying market action, they chalk up the market moves to "psychology," which means that, despite a plethora of news and numerous inventive ways to interpret it, their imaginations aren’t prodigious enough to concoct a credible causal story.
Most of the time it is easy for observers to believe in news causality. Financial markets fluctuate constantly, and news comes out constantly, and sometimes the two elements coincide well enough to reinforce commentators’ mental bias towards mechanical cause and effect. When news and the market fail to coincide, they shrug and disregard the inconsistency. Those operating under the mechanics paradigm in finance never seem to see or care that these glaring anomalies exist."
So, I have strongly urged the members of ElliottWaveTrader to ignore the substance of the news and focus on price action. As one of my members posted a few weeks ago when we were discussing this in relation to the reaction to the CPI report:
"I worked as a trader in EF HUTTON's Government Bond Dept. in years encompassing the last great inflation. We sometimes got 'privileged' information. [Usually through past Federal Reserve staff that decided to 'go work for the street'.] I can attest that having such information beforehand, and positioning with it was just at least as often a disaster as a boon. You MUST learn to ignore it. I left the firm in 1985. EF Hutton was part of Lehman Bros. when they went down the drain. AVI is 100% right IMHO."
And, despite the crazy action seen on Friday, one of my members noted to me:
"Avi, I'm up 2% today and I don't even know what the unemployment numbers were, you've trained me well."
Now, as for the market action, I told you last weekend to expect a pullback in the market. Yet, I was quite dismayed when the market broke down the upper support region during the pullback I expected, and the breakdown may have potentially long-ranging implications.
First, I want to start off reminding you that I expected a sizeable pullback before we came into 2022, and began writing about it at the end of 2021. Yet, I clearly did not expect at the time that we would break down below 4000SPX. Moreover, I have noted many times that I had "issues" with calling the high we struck at the end of 2021 as the major top I have been expecting before we usher in a very long-term bear market. The structure into that high did not look complete to me off the 2020 low.
But, the break down this past week of the upper support I noted has jeopardized our ability to rally to a new all time high, which makes me much more protective, at least from a risk management standpoint. While I strongly urged my members to be raising cash at the end of last year, as well as on the rally back to the 4630SPX region that we saw back in March of this year, I still did not think that the all-time high had yet been struck. Yet, at the time, I explained to our members that until the market actually provides us with a set up to take us to new all-time highs, the prudent course of action was to raise cash until the market provides that set up.
Yet, it still leaves me with questions, as the high struck in the 4800SPX region did not provide us with a completed structure for this bull market off the 2020 lows. But, as I outlined to our members, there are two issues here. The first is pure analysis, which suggests we may still see another higher high in the coming year or two. The second issue is when to risk money to trade for that rally with a high probability expectation.
The implications of this perspective are quite significant. For many years, many have viewed me as a perma-bull, despite our analysis catching the moves on both sides of the price action. But, even so, I have written many times about my longer-term expectations of the potential for a very long bear market taking hold once we complete the rally structure off the 2009 low.
So, for now, I will remain quite protective for risk management purposes. Therefore, I will continue to raise cash on rallies until the market provides me with a set-up pointing to a new all-time high. And, as long as we hold the 3580/90SPX support in the coming week or so, I am looking for a rally back up to 4100+SPX. Should the market provide me with an indication that we are setting up for a new all-time high, I will certainly take advantage of that set up. But, for now, I am going to be using rallies to continually raise cash.
The main point I am trying to make is that unless the market provides me with a set up over the coming month or two that points us to new all-time highs, then any rallies we see into 2023 may be capped at the 4300-4600SPX region. And, that would mean that we may have begun a bear market that can last between 13-21 years long. If we get "lucky" and see a truncated bear market then it may only last 5-8 years. But, I will not be able to make that determination for at least another 5-6 years from now.
As far as my targets for this bear market, well, if we get the fullness of my larger bear market expectation, then I am looking at a return to the 1000 region within the next 13-21 years. Yes, you heard me right.
I know this sounds so extreme and unbelievable to many of you. But, I can assure you that this type of targeting works quite well the great majority of the time, despite how unbelievable it may sound to you right now. Let me give you an example of how well it works.
For those of you that followed our work in the early years of ElliottWaveTrader.net, you may remember my market call for a top in gold at the $1,915 region. And, it was made at a time when the gold market was rising parabolically in the summer of 2011, with some days seeing $50+ market moves. In fact, at the time, the only arguments you would hear amongst the analyst community was just how far past $2000 gold was going to travel. Yet, not only did I call for an expected market top, I was even noting downside projections with a minimum target of the $1,000 region. Yes, this was before gold even topped. As we now know, gold topped a little over a month later at $1,921, and bottomed 5 years later at $1,050 (a bottom which we called in real-time as well).
But the potential drop to 1000SPX will not be direct. The first major downside target is going to be the 1775-2200SPX region. The nature of the multi-year rally I expect off that support will tell us if we will continue in this bear market until we strike the 1000 region or not. But, as I noted, we are at least 5-6 years away from being able to make that determination.
In summary, I simply want to note that the support for the coming week is in the 3580/90SPX region. And, as long as it holds, I am looking for a rally to 4100+SPX. For now, I am going to treat rallies as corrective in nature for risk management purposes, unless the market provides me with a clear bullish structure. And, I am certainly not ruling out a more bullish outcome due to the lack of clear topping structure at the 4800SPX region. But, until the market proves that to me, I think risk management has to trump all other perspectives.
Lastly, for those that followed me on my last major buy-the-dip call at 2200SPX, you still have almost doubled your money from that point, even if you did not heed my calls at 4800 and 4630 to raise cash. So, my suggestion is to continue to raise cash and bank the profits you made in the market as we rally higher in the coming months, at least until the market proves to us that a new all-time high is going to be seen over the coming year or two. But, one way or another, I believe that larger bear market is looming large on our horizon.