Sentiment Speaks: Rates Are Going To Kill The Market; Until The Aliens Arrive

There are two things in the news that seem quite prevalent of late.

First, it seems that most market participants believe that the recent rise in interest rates are causing our market to decline.

And, second, it seems many have become more concerned about UFOs and aliens and it may be causing fear in our markets.

So, let’s look at the first belief to see if that is the cause of our market decline.

What I find quite interesting is that when the rates were this high back at the end of 2022, the market was in the 3500SPX region. Now, even after a 5% drop in the S&P 500 from the recent highs, we are still 25% higher than we were back at the lows of 2022.

Moreover, the Fed has not signaled any indications that it intends to stop raising rates, and there is clearly no hints of their intention to lower them. Yet, again, we are still 25% higher than we were back at the lows of 2022.

So, should I believe all the talking heads and analysts that are blaming this decline on the Fed and rates? Should I ignore the facts I am seeing with my own eyes and, instead, believe that rates are driving this market?

I am sorry to put it this way, but you are living in an alternative and fantasy universe if you believe that the market ignored high rates over the last nine months while it rallied 30%, yet believe that it somehow woke up and now cares about high rates and is declining due to that reason. Was the market just wrong for the last nine months and now it is waking up to be right?

As Jesse Livermore aptly noted:

“A prudent speculator never argues with the tape. Markets are never wrong, opinions often are.”

Or, maybe this decline has been caused by all the recent public fear of UFOs and aliens? I mean, it seems pretty clear to anyone who is viewing this market from an intellectually honest perspective that the fallacious correlation between rates and the market has been destroyed. So, this seems to be a reasonable alternative as to why the market has been declining of late. (smile)

Or, consider if it would make more sense that the pundits, analysts and media are simply trying to find any reason to blame the current decline upon, not really caring if there is any internal consistency in their perspective?

I am again going to quote what Robert Prechter wisely noted in The Socionomic Theory of Finance (a book I believe every single investor should read):

“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.”

When you are able to internalize Mr. Prechter’s message, you will begin to be a more discerning reader of public financial information. And, ultimately, it will lead you to becoming a better investor, rather than someone who simply follows the herd.

Throughout the years, our subscribers have indicated how much this perspective has helped them in their own investment decisions, and these are some of the recent posts they have made within our services:

“Once Avi pointed out how often the talking heads provide the exact same “reasons” to explain completely opposite market reactions, I couldn’t unsee it. This has caused me to focus on the market’s actual price movements to determine entries, exits and strategies instead of the news and trying to choose which media opinion I “felt” was correct. Because of this, my profitability has gone way up and my stress has gone way down.”

“Soon after joining EWT it became apparent that my view of the markets was a bit mirky, and the idea that news drives markets was flawed. Learning EW theory and reading sentiment is much more profitable than following news pundits with terrible track records which is just infotainment at best!”

Let's move on to our market perspective.

When we began 2023, I remained quite steadfast in my views that the market had a date with levels north of 4300SPX. I outlined my views quite clearly, reiterated this expectation weekly (and sometimes even daily to our subscribers), and stuck to my guns despite the extreme bearishness abound at the time, with the great majority being equally steadfast in their bearish view. In fact, I was told many times that “4300 is not going to happen.”

And, when the market began to hit levels north of 4300SPX at which I began to get uncomfortable due to striking our targets, I urged caution. As we were looking for the market to top out in July, I had been outlining my expectation for a pullback and provided you a target over the past weeks. And, as those that have read my analysis know, the target for this pullback was in the 4270-4350SPX region. As of Friday, we have struck the top of our target region.

At this time, I no longer remain steadfast in maintaining any directional bias. I am simply going to await the market’s next move to let me know if it will choose the more immediate bearish outcome pointing us lower than the October low or the more immediate bullish outcome pointing us next to the 4800SPX region. Again, at this time, I maintain no strong bias, even though my “preference” would be for the rally to 4800 for all the detailed reasons I have outlined to members. I am simply going to let the market direct us based upon its action in the coming two weeks.

And, how will I do that?

Well, that is based upon our Fibonacci Pinball method of applying Elliott Wave analysis.

Over the years, one of the biggest issues that many have expressed regarding Elliott Wave analysis is that it is too subjective in nature. A little over a decade ago, I identified a methodology of applying Elliott Wave analysis in a much more objective manner, which also provides us early warning if a pattern structure is going to break down. I called it Fibonacci Pinball, as it is based upon the manner in which a structure pinballs back and forth through specific Fibonacci extensions during an impulsive structure. Should the market fail to follow this path, then it provides us with an early warning that the pattern will not follow through, and it tells us to adjust our positioning so that losses are avoided.

If you would like to read more about our methodology, feel free to read this 6-part intro series I wrote years ago.

What we are now tracking is a pivot of resistance in the 4394-4418SPX region. As long as the next “bounce” in the market is contained by that resistance, then pressure will continue to remain lower towards the next downside target in the 4297-4320SPX region. Should we reach that target, then we will lower our resistance pivot for the next expected “bounce.”

Alternatively, should the market break out through a pivot before it completes a 5-wave decline into the 4230-4270SPX region in the coming weeks, then that is an early indication that the market is going to take the bullish path to the 4800SPX region next. Of course, I will need to see a bit more confirmation based upon the structure of the move through the resistance. But a break of the resistance would be a strong early indication.

So, my suggestion to all reading my article would be to maintain an open mind over the coming two weeks. The bulls and bears are about to do battle, and the market will make it clear which direction it will choose for the rest of 2023. Will you be listening carefully?