Sentiment Speaks: Is A Market Crash Still Possible?

Some have called me a contrarian investor. Some have called me an Elliott Wave investor. And, some have called me outright crazy.

Well, to be honest, I can understand each and every one of those statements. In fact, when you break it down, they are all saying the same thing.

We utilize Elliott Wave analysis to not only tell us where we are in the market trend, but it also identifies the points of extreme sentiment, which is where market tops and bottoms are struck. So, I am looking for tops and bottoms to the market just when the majority have become certain that the existing trend will continue unabated. And, when I invest based upon that perspective, many view me as a contrarian, and many others view me as simply crazy.

In fact, there is a relatively recent story I love to tell. My wife handles our youngest children's 529 investment programs. And, at the end of 2019, I told her to take them out of the market and to put it into cash in the 529 accounts. She did so without batting an eye. Then, in March of 2020, when the market was approaching the 2200SPX region, I told her to put the money back into the stock market, even though everyone was freaking out with the stock market crashing. She looked at me quite shocked, and then asked me "are you sure?" Yes, my own wife thought me to be a bit crazy when I told her what to do with the children's investments.

Anyone that has followed my public work for the last 12 years knows the truth of my statements above. And, if you have been following closely, then you know we have made some truly "crazy" market calls through the years. The following list is just a sample of the type of "crazy" calls we have made:

• July of 2011: Called for a rally in DXY from 73 with a target of 103.53 while the Fed was pumping QE into the market and everyone was expecting a dollar crash. Market rallied initially to a target of 103.82 before a multi-year pullback, as we expected.
• August of 2011: Called for a top in gold at $1,915 while gold was going through a parabolic rally. Also called for a downside target of the $1,000 region before it even topped. Market topped within $6 of our target.
• September 2015: Rolled out the EWT Mining Stock service, and started suggesting buys on stocks like Barrick Gold (at $7) and Newmont Mining (at $16).
• December 2015: Called for a major bottom in gold the night we struck the bottom, despite the market turning extremely bearish at the time and expecting a breakdown below $1,000.
• December 2015: Called for a market top in the 2100SPX region, to be followed by a pullback towards 1800, and followed by a "global melt-up" to at least 2600SPX "no matter who gets elected" in 2016. Market bottomed at 1810, and began a strong rally to 2872.
• November 2018: Called for a bottom in TLT in the 112/113 region, with the expectation of a larger rally to follow. TLT bottomed at 111.90, and rallied to 179.70, despite the Fed still strongly raising rates at the time it bottomed.
• December 2019: Called for a 30% correction to begin in the first quarter of 2020. We began the Covid Crash in February of 2020.
• March 2020: Called for a major market bottom at 2200SPX, with an expectation of a rally to at least 4000SPX. Market bottomed within 13 points of our target.
• April 2022: Suggested to cash in most of our NEM positions (bought in 2015 at $16) in the $84/85 region. NEM topped at 86.37 and proceeded to drop 57% immediately thereafter.
• October 2022: Called for a bottom to the SPX in the 3500SPX region on the day that a much worse-than-expected CPI report was published, with an expectation that we will rally to 4300+ from there.

Again, this is just a small sample of the major calls we have made through the years, all of which were completely opposite to the common market views at their respective times.

So, over the last 9 months, we have heard all the reasons as to why the market was going to continue to levels lower than the 3500SPX low struck in October of 2022: valuations are stretched, earnings are poised to fall, inflation is still too high, interest rates have higher to be seen, etc. Yet, all these reasons have kept people from joining a 30% nine-month rally off the October 2022 low.

Moreover, most people do not even recognize that the reason they continued to look at the market bearishly was because the sentiment was quite bearish. And, most people do not recognize a sentiment transition from bearish to bullish until the market is more than halfway through its rally structure. At that point, sentiment begins to shift bullish, and as the trend continues, sentiment turns to a bullish extreme, which ultimately marks a top. This is simply how the market works year after year throughout history.

The amazing thing about this is that the structure of the price movement often clues us in to where within the trend we reside. And, the structure is what allows us to identify where turns can occur.

Yet, I want to remind you that there is nothing that is perfect when attempting to understand human nature. So, we approach the market based upon probabilities, and not certainties. And, while we have been able to identify most of the major turns in the market through the years, there are times we will inevitably be wrong.

But, the point to our method is that it provides us with a correct assessment of the market context the great majority of the time. Yet, one of the most valuable aspects of our analysis methodology is that it provides an early warning as to when we are wrong in a minority of circumstances, so we are able to course correct quite quickly. And, as I said, many of those that have followed us through the last 12 years will likely attest to this point.

As both our retail and money manager clients have noted:

"Personally, I am fundamentals meet technicals kind of guy.....but when it comes to markets that Avi & team analyze...I have not seen any one come close in my 25 yrs of observation. Avi for me is a financial myth buster."

"We've never spoken, but I have been a member for about 19 months and I just want to say thank you for the work you and your team does. This service has changed my entire perspective on the markets in a positive way. Some context, I am Chief Investment Officer of a boutique Wealth Management firm with approximately 1.5B in AUM, so your knowledge and expertise touches everyone of our clients, and for that I am extremely thankful. Thank you again! Kind regards, John"

But, as I am sure you have seen over the course of the last nine months, market participants were viewing valuations, earnings, inflation, and interest rates as being the "reality" of the market. And, this kept them well entrenched in their bearish perspective.

In fact, I saw a very interesting comment recently:

"We are both old enough and we should know better - that "the days of the stock market ignoring reality" are never over."

What this investor is clearly saying is that if someone has a lot of experience in the market, they should be able to recognize that the market ignores what he deems to be "reality." And, I am quite sure they view "reality" as do most participants - that is valuation, earnings, inflation, interest rates, etc.

But, while this investor is astute enough to recognize that the market seemingly ignores these factors, he has not gone far enough in trying to understand what is really important to the market. Why does the market seemingly ignore these factors? Is this truly the "reality" of the market if the market ignores these factors? Or, is there something else that is more important that is driving it?

This is the point of the articles I have now been writing for the last 12 years. Tracking market sentiment is a much more accurate manner to determine market direction as compared to any of the factors most investors focus upon.

Many did not learn this lesson in the spring of 2020. While we called for a market low in the 2200SPX region, with the expectation of a rally to 4000+ at the time, most kept shorting the market because they "knew" that the effects of Covid were going to take us much lower. And, many did not learn this lesson again in October of 2022 until today, as they "knew" that the market was going to go lower as well.

Remember, several hundred years ago, everyone "knew" that the world was flat.

Insanity, based upon Einstein's definition, is doing the same thing over and over while expecting a different result. Based upon Einstein's definition, one must conclude that most market participants are insane.

But, many former bears have lately been turning quite bullish. Are they right for doing so after a 30% rally? Or, are they jumping in just as the market is about to reverse?

I have said over the last year that I am not wholly convinced that the all-time high is set in place at the high of 2021. The structure just did not seem complete and we did not reach my ideal target for the SPX. Yet, for risk management reasons, I have recently turned very cautious once the market hit our target in the 4375-4433SPX region from the bottom we called in October of 2022. Yet, the pullback from that region was clearly corrective, which had me looking higher again last week. And, as we stand today, I am taking this one step at a time, but in a very cautious manner.

The pullback on Friday seemed quite corrective as well. And, we have upper support in the 4460-75SPX region. Should the market hold that support in the coming week, then our next upside target is in the 4550-65SPX region. However, should we break that upper support, we will have to assess the nature of the decline. If the decline is impulsive in nature, then I fear we may be starting a sizeable decline which can lead to a market crash later this year. However, if the decline is corrective in nature, then I will continue looking towards higher targets.

But, for the moment, I do not see a high probability path pointing directly to new all-time highs. If we are indeed heading to new all-time highs and my ideal targets north of 5000, we will likely need to see two larger corrective pullbacks. So, I will continue to remain objective and listen to what the market is telling me over the coming weeks and months.

Therefore, while many were absolutely certain during the last nine months that the market was going to drop down to the 3000SPX region, or potentially even lower, I have been adamant in looking higher after we caught the low in October. At this time, I am not so adamant anymore, as we have now rallied 30% off the October low. Right now, I am much more cautious. And, should I see a 5-wave decline begin at any point in time, I am going to prepare for what can be a market crash later this year.

Yes, I know that a crash is now off the radar for many people, but in order to provide an appropriate setup for a market crash, most investors have to be convinced that it simply cannot happen. And, with the market pushing a record number of short traders out of the market over these last several months, we do have the environment for that type of setup. But, we still do not have the actual setup. And, until such time as we do, I am going to trade further upside quite cautiously and watch the market carefully to see if it still has an intention of reaching 5000+ before a major multi-year (if not multi-decade) bear market begins.