Sentiment Speaks: The Next 3 Months Will Tell Us If We Have A Crash Setting Up This Year

I have now been writing on Seeking Alpha for a dozen years and I have to say that I am quite proud of being the first to focus on "sentiment" as a main market driver on this platform. In fact, we now see a number of articles every single week that highlights sentiment perspectives. Yet, many are still well behind the curve as to how one can appropriately gauge sentiment to glean indications for market direction.

So, if you are at all interested in the perspective that I have been touting and which has been seemingly followed over the last dozen years by many other authors, feel free to read this six-part series that I penned on Seeking Alpha and EWT a number of years ago:.

This week, I am going to take a little time to address some of the "logic" that is being regurgitated through the public pages of the internet. But, before I do, I want to take a moment to remind you that the market is not a logical environment. Rather, it is an emotional one. And, anyone with any honest experience in markets knows exactly that of which I speak.

You see, attempting to apply logic to an emotional environment is akin to arguing logic to your spouse when they are emotional. How well does that work for you? Therefore, consider how well all the "reasons" proffered in public articles are really going to help you successfully navigate an emotionally driven market.

So, let's start with this beauty of a quote that I found in a comment section this past week:

"Anyone else who has tried to apply economic policy knowledge has been hammered. The only explanation I can come up with is that the economy is flooded with liquidity."

Well, the first part of this quote is 100% accurate. However, the leap made in the second segment of this quote truly misses the mark. If you correctly recognize that economics is not going to help you navigate the financial markets, then should you not attempt to identify what will?

I think Robert Prechter put his best in his seminal book The Socionomic Theory of Finance (a book which I strongly recommend to each and every investor). Within his book, Mr. Prechter noted that whereas the law of "supply and demand operates among rational valuers to produce equilibrium in the marketplace for utilitarian goods and services . . . [i]n finance, uncertainty about valuations by other homogenous agents induces unconscious, non-rational herding, which follows endogenously regulated fluctuations in a social mood, which in turn determine financial fluctuations. This dynamic produces non-mean reverting dynamism in financial markets, not equilibrium."

Moreover, since the efficient market hypothesis (the basis for fundamental analysis in financial markets) is an outgrowth from the world of economics, it has become quite commonly viewed as an unworkable paradigm for financial markets (as noted above) for various reasons. Understanding that an underlying assumption within economics is ceteris paribus, and an underlying assumption in the efficient market hypothesis is that all investors act rationally and with the same knowledge, you can easily understand why it is simply unworkable in the real world of financial markets.

In fact, Benoit Mandelbrot outright stated that one cannot reasonably apply an economic model to the financial markets:

"From the availability of the multifractal alternative, it follows that, today, economics and finance must be sharply distinguished . . ."

From an empirical standpoint, consider that, within economic theory, rising prices result in dropping demand, whereas rising prices in a financial market lead to rising demand. Yet, most continue to incorrectly apply the same analysis paradigm to both environments.

So, I will repeat my premise. As most of you know, I started my investing career with fundamental analysis. Yet, I have abandoned it when analyzing the overall market because analyzing market sentiment has been a much more accurate lens through which to view the machinations of the stock market as a whole. And, those that have followed me through the years can attest to this fact.

With all this being said, I want to now explain why I view fundamentals as important. Remember that market sentiment is the primary driver when we are dealing with investment products wherein mass sentiment is evident. However, this is not an absolute perspective. Rather, it is based upon a continuum of sentiment.

You see, while the SPY is an example of an investment product that presents us with the ultimate in mass sentiment, a microcap biotechnology company may be on the opposite end of that continuum of sentiment. Within the example of the microcap, sentiment can be a factor, but the fundamentals of the company are going to be the primary driver of this stock. And, all investment products run somewhere within that continuum. The greater the mass sentiment being evident within the buying and selling of that product, the greater probability that sentiment will be the driver of price. And the reverse is true.

This brings me to another comment I saw this past week:

"Economists, analysts, traders, investors, and even Fed members are confounded right now."

Folks, I have been doing this publicly for well over a decade (and privately for quite a few decades). On Seeking Alpha, I have seen many authors and commenters come and go, with many of them attacking my work for various reasons.

While I have not always been right (our clients track us at 70%+), not only am I still here providing my public views of the markets we cover (and even using my own name publicly), I have become one of the most followed analysts on SA, one of the largest services on SA (and considering we are a technical analysis service, we think that is quite significant on a fundamental analysis website), and have almost 8000 clients (including our Elliottwavetrader.net platform), with almost 1000 of them being money managers. Therefore, I think I have proven myself under fire over the long term. As one of my money manager clients noted:

"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 every one of our clients, and for that I am extremely thankful. Thank you again! Kind regards, John"

I know some of you may view the last few paragraphs as evidence of arrogance. Yet, my point is to evidence that my methodology has provided more correct calls than most, which is why we have grown as we have, especially amongst professional money managers. It is also why we are still here helping tens of thousands navigate these financial markets on Seeking Alpha's public pages.

As another author on Seeking Alpha posted to one of my blog publications:

"One of the reasons these trolls attack you is you project a level of confidence that they perceive as arrogance. Your record speaks for itself but these idiots just can't stand the fact that someone might know more than they do."

Again, I want to note that I clearly am not always right, nor will I ever be able to always be right. That is an impossibility when dealing within a non-linear environment. For example, while I prepared my clients for a drop in the market at the end of 2021, I did not expect that we would break down below 4000SPX at that time. But, even so, we were able to adjust rather quickly, as I strongly urged them to raise cash at 4600SPX.

And, to put this call into context, at the end of 2019 we warned our clients of a 30%+ correction that we thought would begin by the first quarter of 2020, and then suggested we were approaching a major market bottom at 2200SPX back in March of 2020, with expectations of a rally to 4000+.

Therefore, the difference in our perspective is that we maintain our primary perspective regarding the market based upon what we see as the higher probabilities, as outlined by our mathematically based analysis methodology. And, when we are wrong in the minority of circumstances, we are able to identify it in an objective fashion, and adjust accordingly quite quickly.

This brings me to the point I want to make about the market over the coming 3-6 months. You see, I think the market will tell us a lot over that period of time. In fact, in that time, the market will either confirm, with a high degree of probability, that we have begun a very long bear market, or it will tell us if there is still potential that we can rally over 5000SPX in the coming year or two before that very long bear market begins in earnest. While some may question how I can make such a bold statement about the coming months, I will simply tell you that we are approaching a very important deciding factor over that period of time based upon our analysis methodology.

For those that have followed me over the last decade or more, you know that I am not a perma-anything other than perma-profit (a term coined by one of our money manager clients about us). I view the market as objectively as I am humanly able and provide analysis accordingly. And, when I am wrong in my primary perspective, I let my clients know rather quickly, because my client's money is much more important than my ego.

So, you will never see me maintaining a wrong perspective and claiming that the market is wrong rather than my analysis being wrong. Rather, I will adjust to avoid large drawdowns so that we can maintain on the correct side of the market the great majority of the time.

But, make no mistake about it. The coming months are going to be very important to traders and investors alike. And, if you want to read about the larger bear market I foresee in the coming decade or more, please see some of my prior articles on Seeking Alpha. In fact, as far back as 2015/2016 I began warning of the potential for a major bear market to begin as we move into the early to mid-2020s, with the expectation that it can last as long as 20 years until it strikes the bear market bottom.

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.

As you may have been able to glean from my writings, I am one of the few authors (and I am not sure if there are any others out there even now) that provide very specific levels of support and targets. Moreover, the market often turns at the levels we outline. As my clients have noted:

"I see the best quants, strategists and technicians the street has and you and your group are amongst the absolute best. My trading desk is floored at turning levels you are able to provide."

"I'm unaware of any other service that lays out pathways and has the record of wins that you guys have."

So, if you would like a deeper explanation and understanding as to how I came up with these targets or how I identify these turning points, you can feel free to start by reading the 6-part series linked above and then take a free trial to ElliottWaveTrader. We are quite happy to teach our methodology to those willing to learn.