GDP will go negative as market reaches new all-time highs
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
If I told you that I received the GDP report the day before it was announced, and it showed that GDP came in almost half of the general expectations, 99% of those I would tell would automatically assume that the market would drop hard after it was announced. Yet, the market rallied 2% the day this was announced.
Rather than attempting to come up with a convoluted explanation, maybe we need to rethink how we look at the market.
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.
Yet, if I applied the common mechanical "cause-and-effect" paradigm used throughout the market, then I would have to conclude that GDP crashing is good for the market. Does anyone really believe that? Does anyone really believe that a recession would be good for the market?
This past week, I presented a keynote address at the MoneyShow in Las Vegas. After my presentation, an older gentleman asked me a question as to whether I believed that the cessation of fighting in Ukraine would cause the market to rally. Being trained in law school, I answered his question with my own question. I asked him if he knew what happened to the market the day that Russia invaded Ukraine. Of course, his answer was that it clearly went down. You should have seen the shock on his face when I told him that the market began a 10% rally on that exact day.
Another glaring example was the October 2022 CPI report. On Oct. 12, pundits were telling us that if the CPI report they expected to be published the morning of Oct. 13 was worse than expected, then we would see a 5% or worse decline in the market.
That same day, on Oct. 12, I posted the following analysis for the members of ElliottWaveTrader:
"Thus far, the market has made several attempts at hitting the blue box support region on the 60-minute SPX chart. And, each time, divergences continue to grow. And, if you look at the 5-minute SPX chart, there is still opportunity to actually strike that support below as long as we remain below the smaller degree resistance noted. . . But, I think we will likely be much higher than where we stand today as we look out towards the end of October, or even into early November, depending on how long it takes the market to bottom out, and how fast the rally I expect takes hold."
In fact, before the market opened on Thursday morning, and as it was hovering near the lows of the month, I sent out an alert to our members at 8:56 a.m. noting my expectations for a bottom being struck and that "This should now be the selling climax that completes the downside structure." The market bottomed within half an hour of my alert and rallied 6% off the morning low.
Later that day, I saw quite a few comments on Seeking Alpha which mirror this sentiment:
"Am I the only one wondering what the heck is going on with this market? I feel like it makes no sense anymore.. Today made NO sense."
In fact, in a Barron's article later that day, the author outlined the common feeling in the market that day:
"It was a massive rally, and one that came out of nowhere. And it's left market observers like yours truly wondering what the heck just happened. There wasn't any new data, no headline-making speeches, no event that occurred just after the open to spur such a move. It literally came out of nowhere-and left us grasping for possible reasons. "Today's market reversal was a head-scratcher," writes Oanda's Edward Moya. And he's not wrong."
Yet, the members of ElliottWaveTrader were certainly ready for that rally:
"...today was like EW proof on steroids. Had an up 8% portfolio run - including selling shorts at the bottom and immediately loading up on the turn. Without this service I would never have been poised to jump that quick. The confidence of recent updates was pretty overwhelming."
"Just want to say that was an amazing call this morning.. I have been a member for about eight months. Definitely an Elliott Wave neophyte, but lots of trading experience. just amazed. i be 62, old dawg.
As I have written and said more times than I can count, one must recognize that a news event may be a catalyst to a market move at times, yet the substance of the news event may not be determinative of the direction of the market move. And just some of the examples we have seen include the Russian invasion, the October 2022 CPI report, and the GDP report last week.
So, I'm going to repost the brilliant words of Bob Prechter one more time, as it is always worth repeating:
"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." - Bob Prechter. The Socionomic Theory of Finance
So, again, rather than coming up with some convoluted explanation to force some causal story, maybe it's time to recognize that news can act as a catalyst, but the substance of the news will not be determinative of the direction of the market move.
Let's now move into a discussion of the recent market action.
I have not had time to post a stock market article for several weeks. In my last article, I wrote the following:
"In the near term, the 4070SPX level is the key to how we see the action. As long as we hold that level, the "hit" I told you to expect in early April may have only resulted in a very shallow pullback/consolidation, and the market is going to try to rally to 4300+ in a more direct fashion. However, if we break that level of support, then it suggests we see one more pullback before the market sets up the attempt to take us to 4300SPX.
Moreover, back in early March, I outlined the 3810SPX support region which I expected to be tested and likely held. (We hit a low of 3809 the following week and began this current rally). I am still of the same opinion in the higher degree structure. If we do break 4070SPX in the coming week, as long as the market continues to hold over that support in the coming weeks, I still expect us to challenge the 4300-4370SPX region."
So, let me explain the action over this past week, since we did break 4070SPX.
Let's start with the fact that the market has infinite possibilities of paths it can take at any point in time. And our job is to reduce the infinite paths to the highest probability ones.
When the market broke 4070SPX, it opened the door to a pullback as deep as the 3850SPX region. So, when we broke down below 4070SPX, I had to re-analyze the structure and re-calculate the support I expect to hold.
Based upon the structure with which we broke 4070SPX, the 4050SPX region was the next likely support that was going to hold. And, the manner in which we rallied off that support would tell us if we were still going to try to go directly to 4300+, or if we are indeed going to see a much deeper pullback before we begin the rally to 4300+. As we now know, the market bottomed at 4049.36 and began the current rally.
So, please realize that, while you get my public analysis free of charge, I simply am unable to continue to update it on an ongoing basis. That is what I do for the members of ElliottWaveTrader.
As far as the coming week, I think it's quite clear to everyone that 4050SPX is a very important support right now. And, as long as the market only provides us with corrective pullbacks from this point forth, then I'm still expecting a rally to 4300-plus before the market is going to provide to us a bigger pullback which will tell the difference between a bullish second half of 2023 or a very bearish one.
Alternatively, if the market begins an impulsive decline, then I'm going to expect us to break 4050SPX, and potentially test much lower levels before we can determine how and if we can still get to 4300-plus before the bigger swoon I still expect this year.
Lastly, if you have not yet figured it out, the title to the article was facetious and a play on how the market rallied when GDP dropped 50%. (smile)
As an aside, I wrote an article on earnings that many of you may have missed and may be interested in reading. Personally, I think it is one of my better articles. You can see it here.