Sentiment Speaks: The Market Is Simply Getting It Wrong

I really don't know how all of you do it.

Most of you pour over all types of data on a daily basis in order to attempt to gain some advantage in the market. And, when I read other articles and the comments in those other articles, I see so many factors that all of you believe must be taken into consideration.

Among those factors that you are all considering include the Fed, interest rates, the US dollar, yield inversion, China, the labor market, Japan, consumer spending, inflation, the impending government shutdown, and a soft/hard landing (I didn't know we were on an airplane). And, these were just those cited in two articles and comments I read the other day.

And, each person that posts is quite confident that their factor is the major consideration one has to take into account in order to glean the next move in the market.

I don't know about you, but this makes my head spin. How can one possibly weigh all of these considerations in a repeatable process to accurately determine the next move in the stock market?

I believe if we are really honest with ourselves, we would come to the conclusion that one simply cannot do so. Rather, I think it leads to significant confusion many times. And, this week was no exception.

For example, here is a headline that we saw on Friday:

"Dow rises Friday as Wall Street weighs the prospects of future rate hikes after Powell speech"

Are you scratching your head? I know I am. What the heck does that headline even mean? I think it displays the utter confusion of the writer in trying to present a "reason" as to why the market rallied on Friday despite the Fed reiterating it will continue to raise rates.

In fact, I saw the following comment on one of the articles I just read:

"I don't know what the markets were thinking today. It remind me of the scene in Independence Day, where people were celebrating and dancing on the skyscraper roof, just before the ship opened and zapped them like bugs. Today was the dancing, next week likely will be the zapping."

Clearly, many were thinking that the market simply got it wrong. Well, may I again remind you of the famous words of Jesse Livermore:

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

While you may be sick of my quoting Robert Prechter's The Socionomic Theory of Finance, I think it is one of the most brilliant books ever written on how the stock market really works. And, this quote is worth repeating until you are all able to internalize its lesson:

"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."

And, if you continue to follow all the factors noted above, you will likely continue to flounder, especially on days like Friday.

For those that do not know the story of how I began providing my analysis publicly, well, I can tell you that I was basically pushed into it by a popular market analyst who has been around for many decades. The reason he kept pushing me, as he explained to me, was due to the accuracy of my analysis, especially in the face of contrary expectations among the masses.

The reason I had been able to do so was simply because I kept my analysis as simple as possible, followed principles of Occam's Razor and Fibonacci Pinball (our own creation), and tuned out all the extraneous noise. I simply focused upon my process. And, having grown to 8,000 subscribers and almost 1,000 money manager clients since that time, I think it has served us all quite well.

In fact, this is what our subscribers have recently noted:

"You nailed every twist and turn in this crazy market. I am really happy to have your service!!"

"I echo the amazement at the reliability of fibs, and in particular Avi and Mike's blue boxes. You guys have been playing these twists and turns like a fiddle."

I will now tell you that even though we have caught most of the twists and turns in the last year and half, it has still presented me with the most difficult market I have faced during the 12 years since we opened ElliottWaveTrader.

If you have read my analysis during the last year and a half, you would know how torn I am on the bigger picture in the market. From an absolute purist standpoint, I still have a huge issue with calling 2021 the top to the market since we do not have a clear 5-wave completed rally into that high from the March 2020 low.

Yet, the structure of the rally which began in October 2022 had not been providing me a clear indication that we were going to rally back up to the 5000+ region that I was seeking for a long-term top to be struck. And, due to this uncertainty, I have been unable to be as strongly bullish in my expectations as you have seen prior to this period of time. So, risk management has been a strong focus for me, as I have been taking this one step at a time.

Even so, I remained quite steadfast in my expectations for the market to rally to 4300+, which was my primary expectation off the 3500SPX low, despite all the voices to the contrary. And, I noted that the manner in which the market would decline once that rally completed would provide us with our indication as to whether we had a major top in place, or if the market was going to rally to 4800SPX next.

So, this is where I have to lean upon what has kept me successful for decades, and stay true to my process. I said the same when I maintained my expectation for a large decline for the first quarter of 2020 in the face of a seemingly strong SPX rally (even before the word Covid was known). I said the same when I expected the market to bottom around the 2200SPX region and begin a rally taking us north of 4000SPX, despite a record amount of bearishness at the time. And, I said the same in numerous other major trend change calls in the metals complex, in the US Dollar index, and in the bond market through the years, despite most expectations to the contrary at the time. Again, I have to stay true to my process as that has worked the great majority of the time during my career.

As one of our long-term members (who has been with me since we opened ElliottWaveTrader almost 12 years ago) noted this past week:

"The number of different markets, i.e., TLT, Metals, Oil, IWM, SPX etc.., that you have absolutely nailed over the years is legend."

So, allow me to provide to you the parameters I am following for the next few weeks. And, forgive me if I ignore all the considerations noted at the beginning of my article. I will continue to stick with a tried and true process, while ignoring what seems to confuse most.

If the market is going to take a direct path to the 4800SPX region next, then it should hold over Friday's low, and break out over the next resistance region overhead in the 4479-4490SPX region. Should we see that action in the coming week, then support will be the 4400SPX region, which may yet be tested again in the coming weeks on a pullback before we continue to the 4800SPX region.

However, if the market breaks down below Friday's low, then the next lower support resides in the 4270-4297SPX region. Below that, we have the 4180-4230SPX region. And, depending upon which level holds support will tell us if we have a major high in place or if the market is going to head to the 4800SPX region next.

Moreover, I will tell you that the resolution is not likely what you think when reading what I just wrote. A hold of the 4270-4297SPX region, followed by a corrective bounce to 4400-4500SPX region would be a very bearish indication.

So, I am going to remain a bit more patient, and allow the market to provide me with a stronger indication of its intention in the coming week. And, remember, I cannot provide to you the analysis detail that I provide to members of my services. Yet, you have the general parameters we will be following.