Sentiment Speaks: The Bears May Get What They Want - A Market Crash

After writing for almost 13 years on Seeking Alpha, we now have 75,000 followers, the 3^rd largest service in SA’s Investing Groups, and 8000 total subscribers to our services including our original platform on ElliottWaveTrader, of which almost 1000 of them are money managers. So, I am often asked how one can become a successful author on Seeking Alpha? And, my answer is to provide honest, accurate analysis which is different than everyone else. But, that is a lot easier said than done.

Unfortunately, most analysis that is posted about the market is just a regurgitation of common fallacies as to what drives and affects the market, or just telling us what the market is doing at this moment while linearly expecting that to continue in the future, or simply retaining the same perspective all the time no matter what the market does, while claiming that the market is wrong. And, I get so frustrated when I read it over and over.

In fact, most of you probably feel the same in the pit of your stomach when listening or reading much of what is said about the market. But, sometimes, you just can’t exactly put your finger on what it is that does not sit right. So, let me give you an example that occurred to me this past week.

This past week, when I was reading a comments section, I came across the following comment:

“I don’t think the SPY drops below 410 until the market sees the economy slowing and unemployment rising. It will look ahead 6 months for signs of that and take the market down when it sees that happening in the future. Watch leading indicators like jobless numbers and GDP. And of course earnings reports.”

I simply could not help myself, and felt absolutely compelled to reply to this comment. So, I penned the following response:

“First of all, do you really believe that the stock market is clairvoyant or omniscient so that it can see into the future? Or, is it simply that fundamentals lag what drives the stock market - - market sentiment? And, that makes it seem like the market is what looks into the future.

I know which one to me is a more reasonable approach. And, yes, I know that "everyone" repeats it all the time. But, no one really thinks either. I can assure you that this is an outright fallacy, yet it is commonly regurgitated.

I have written about this before if you care to understand why I think this is so preposterous:

How To Analyze Market Sentiment Along With Market Fundamentals

My second question to you is do you really believe employment numbers or GDP are "leading indicators?" They are numbers about what has happened in the past. How can they be a ‘leading indicator?’”

This was the response that followed:

“I mean Israel could be starting WWIII so how could the market possibly predict that? No what I am saying is that all things being equal, and there are no exogenous surprises, that the market will react right now to fundamental factors that are indicators as to what is happening to earnings, GDP, the economy, the consumer and unemployment. When it sees these fundamental things happening in the future it discounts price now.

Perhaps that is why you missed the market discounting what high interest rates would do. It was wrong and over-discounted taking the market down to the bottom. Then it corrected its error, because of the strong economy and hot jobs market as well as good earnings. Now it is beginning to discount bad news again and is fighting a downtrend. Even good news is failing to break above the downtrend and there is plenty of good news. Remember how the market dropped before 9/11? What did it know? What does it now know about the war in Gaza?”

And, this was my response:

“Well, this is another issue I have. I do not believe exogenous events are as important as do you. For example, even though many try to blame this decline on the ME war, most people just ignore the fact that we went UP 2.7% when the market opened after the war BEFORE we started to drop. So, even though we say that correlation is not akin to causation, even correlation is an issue with the ME war "causing" this decline. That is, unless people just want to retain their blinders. I mean, who cares about the facts in light of a good story. :)

Second, as far as interest rates . . well, interest rates were around the same place when the market was around 4600SPX as they were when the market was around 3500SPX. So, gotta throw that out the window also.

As far as 9/11, well, there is yet another fallacy we can dispense with. The market was already in a year and half long decline before 9/11 hit. Are you saying that the market knew in 2000 when we topped that 9/11 was coming?

Moreover, I have challenged THOUSANDS of people as to whether they can pick out 9/11 on a chart that does not have dates. And, not a single person has successfully done that. NOT ONE!!! And, you know why? Because these exogenous factors and events are not anywhere as meaningful as people erroneously believe. You can read that here:

Sentiment Speaks: Here Is Next Week's News In Advance - How Will You Trade It?

Most do not even realize we rallied 15% starting on the EXACT DAY that Russia invaded Ukraine. . . I hope I am being clear about my position regarding there being way too many market fallacies propagated and regurgitated through the halls of SA and many other media sites.”

What I did not address was this segment of his comment:

“that all things being equal, and there are no exogenous surprises, that the market will react right now to fundamental factors that are indicators as to what is happening to earnings, GDP, the economy, the consumer and unemployment.”

And, this is the crux of what is wrong with most analysis today. It suggests that ‘as long as all conditions remain as I want them to be,’ then the market will follow a myriad of factors to determine which direction it will travel. Do you see the issue with this type of market perspective?

It reminds me of an old joke a friend of mine told me years ago about economists. Two economists fell into a deep pit. They each were looking up and down the walls of the pit for a way out. They tried to scale the wall, but it was to no avail. All of a sudden, one economist beams with an idea, turns to the other economists, and says “assume a ladder.”

Unfortunately, much of what we read today is based upon fallacies like the ones I debated above. This applies to commenters as well as authors. And, no, the market is not wrong if it is moving in a direction that you do not think is right. Rather, you are wrong. Yet, this is just the way most of the world views the market. But, remember, most of the world once thought that the world was flat.

It reminds me of something Jesse Livermore would say:

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

It also brings me back to something that Robert Prechter wrote in The Socionomic Theory of Finance (a book I highly recommend), which I quote quite often:

“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 challenge most investors or analysts with these anomalies, they are often quite flummoxed and stumble for an answer. You can see the debate I quoted above as an example. You see, there are many beliefs that investors and analysts maintain. But, how many have actually tested those beliefs with actual facts? I am sad to say, very few. If they did, they would not maintain those beliefs when there are facts in complete contravention to their belief. But, as I said above, why let facts get in the way of a good story?

Unfortunately, the response to my last comment went down the path of personal attacks rather than addressing the facts and questions I presented, so I have not quoted the rest of the “debate.” Sadly, we see this all too often. And, as Socrates wisely noted: "When the debate is lost, slander becomes the tool of the loser."

Now, I am not saying that I will be right all the time in my perspective. But, I am saying that I maintain an intellectually honest perspective in everything I do. So, I approach the market based upon a mathematically derived methodology which provides to me objective parameters as to when my primary view is right or wrong. And, this past week, my expectation was that the 4165SPX support was going to hold. When it did not, it told me quite clearly that I now had to be much more cautious in my perspective and that a move to 4800SPX was not as high a probability as I thought it was last weekend. And, with the market moving down to the 4100SPX region, I outlined what that would mean in my last article.

Now, this past week, I was questioned by the same commenter above as to whether my view is bullish or bearish. Unfortunately, I do not look at the market through a lens that is purely black or white. Rather, I recognize that the answer is all based upon time-frame. You see, I can view the market as bullish over the coming weeks or months, but then bearish thereafter. Do you think I serve my clients best by saying that I am only bearish or only bullish? Absolutely not. And, that is not the way the market works either.

The difference between the manner in which I view the market and the manner in which others view it is that I am afforded a larger degree context to the market in using Elliott Wave analysis. In fact, market context is what is sorely missing from most analysis.

Whereas someone can confidently state that they are bearish simply because the market is currently dropping, do they have any perspective as to when that drop will complete? Do they have any indication as to when to prepare for a potential market reversal? The answer is usually “no,” because they do not have the tools to be able to do so. And, that is one of the main purposes for using Elliott Wave analysis.

As Paul Tudor Jones was quoted as saying:

"I attribute a lot of my success to Elliot Wave Theory. It allows one to create incredibly favorable risk reward opportunities"

Yet, what most analysts do is they present the market to you as it currently represents. So, if it is going down, the market is bearish and they are bearish. If it is going up, then it is bullish and they are bullish. But, our goal as investors is to be able to outperform. And, the only way to do that is to be able to identify points in time when a market reversal is favorable. Any simpleton can look at a downtrend and say “I am bearish.”

Let me give you an example. One year ago, everyone was terribly bearish, and expecting the market to continue to drop below 3500SPX, especially when the CPI report came out on October 13 hotter than most expected. However, our analysis suggested that market conditions were ripe for a reversal. Moreover, even before that reversal became evident, I outlined my expectation for the reversal to carry us to the 4375-4505SPX region. And, while the market even exceeded the target we set before the reversal occurred, I was urging my subscribers and money manager clients to raise cash as we moved into the target region. I wanted to see the nature of the decline I expected thereafter in order to know if it was safe to move back into the market.

So, allow me to explain to you how I see the market context right now.

With the break-down below 4165SPX, and heading directly to the 4100SPX region, it tells me that the market may be setting up a market crash a bit sooner than I had expected. Do I think this is happening tomorrow? Well, not unless we see a direct break-down below 4000. But, the great majority of the time that the market is in this posture, we normally see a sizeable rally, which can set up a market crash. And, I hope you are sitting, but if that set up develops, then my target is the 2900-3300SPX region. Believe it or not, this would only be the first leg down in a multi-year bear market.

In the meantime, I will say that support right now resides at 4101SPX, 4060SPX, and 3997SPX. As I write this update on the weekend, it seems that the market is again ripe for a reversal. And, as long as we remain over 4000SPX, I believe we are approaching a near-term bottom, which will then set up a rally over the coming weeks or months. I am not sure exactly how long the rally will take, but I am targeting the 4350-4475SPX region as of right now. Much will depend upon where we find a bottom, and how the rally takes shape.

Now, am I completely giving up on the potential for the market to head to 4800SPX? The answer is also no. I am keeping that potential in the back of my mind. I want to see how the market structure takes shape in the coming weeks and months before I am ready to tell you that a market crash is setting up, or if we are indeed going to 4800SPX.

In simple terms, due to the market’s drop to the 4100SPX region, it has now provided us an environment which can set up a market crash which would point us down to the 2900-3300SPX region before another multi-year bear market rally begins. Will it actually happen? Well, I cannot tell you that with a high degree of probability just yet. I will need to see how the next rally takes shape. But, make no mistake about it. The drop to 4100SPX has certainly increased that probability.

I want to close this missive by quoting some general segments of my market analysis update I wrote to my subscribers and clients this past weekend (clearly, I am leaving out the technical details):

“Anyone reading my analysis over the last several years knows quite well that I have been expecting a multi-year, and potentially even a multi-decade, bear market which can be clearly seen from the attached monthly chart of the SPX. However, due to the nature of the structure into the 2021 market high, I still had questions as to whether the 2021 high represented the high of the bull market. So, I have been giving the market room to prove to me that we can rally to the 5000 region before the bear market I expect begins in earnest.

With the drop this week to the 4100SPX region, we have taken a step closer in confirming that the long-term bear market may have already begun. And, based upon the action we see over the next two months, the market may provide final confirmation. . .

I want to take a moment to explain to you how difficult this update has been for me to write. In fact, my hands are shaking as I write this outline for the potential of a market crash taking shape into 2024. The ramifications of such an impending bear market will be quite severe and significant for many members of our society. It will cause much suffering over the coming decade for those who were unable to foresee or prepare for the environment into which we would be heading. And, all these years that I have been seeing this develop have had me praying that I am wrong in this view. But, I eventually knew the day would come that the market would confirm this long-term bear market. And, we may be seeing that set up for confirmation develop in the coming months. . .

Our parameters are now set for our next several months. How the market takes shape over the next 2-3 months can have quite serious near-term and long-term ramifications for our financial future. So, I am going to take a very cautious stance in both my analysis and my personal financial planning. But, please keep in mind that this is not written in stone. There is still a strong alternative that I will be tracking that can still point us back to the 4800SPX region. However, for now, I have to make that my alternative count, at least until I have stronger indications that this is what the market intends to do into 2024.

I sincerely hope I have conveyed the seriousness with which I have written this market update. It is likely one of the most difficult ones I have had to write in my 12-year career as a market analyst. While it is certainly not written in stone that this is what will happen in the coming months, the environment for such a market decline is now in place. Please do not treat that lightly until the market provides us with additional proof that the downside set up will not take shape.”