Sentiment Speaks: Trump Did Not 'Cause' The Rally This Past Week

Before your head explodes after reading the title of this article, I am going to ask you to maintain an open mind as you read through this article. It may cause you to begin to see the market as it is rather than as you believe it to be. In other words, try not to be “burdened by what has been.” (smile)

So, for those that are new to our analysis, I would like to make a point regarding the “cause” of this rally. I know that 99.9% of the market is certain that the cause of this rally was due to the election results. I have seen dozens of articles now outlining that the Trump win was clearly the cause of the rally. However, I would like to test that premise.

If you had been following our work of late, you would know that as long as the market held the 5674SPX region, I had been seeking an initial 5-wave structure that began over that support. As I outlined, if we would see that 5-wave rally structure, it was going to point us to the 6020SPX region next, based upon our Fibonacci Pinball methodology of Elliott Wave analysis. Well, as we now know - and as I outlined to our members of The Market Pinball Wizard, on Tuesday and Wednesday the market provided us with that 5-wave rally. That then set my expectations for the rally to 6020SPX next WELL BEFORE the election results were known.

As of Friday, the market rallied to 6012SPX.

Moreover, if you look at the action in the overnight market as the election results began rolling in late at night, when Donald Trump was finally announced as the expected winner, approximately 100 points of the 150-point overnight rally had already completed before we knew who the winner was going to be. And, once we saw a spike at the winner announcement, the market then began a corrective pullback for the rest of the night, which bottomed at the EXACT support region we outlined on a chart I presented to the members of The Market Pinball Wizard during the overnight action.

So, while many want to claim that the rally was due to Trump winning the election, I would suggest that the election itself (not the winner of the election) was the catalyst of the rally for which the market was set up well before the election results were announced. That means that the actual winner of the election was not likely material. And, as I quote often, Alan Greenspan has noted, “it hardly makes any difference who will be the next president. The world is governed by market forces.” I think the market may have proved this again this past week.

Again, my perspective (which is supported by the empirical evidence) is that the election itself seems to have been the catalyst of the rally for which the market was set up before the results were announced. And, the action we saw in the overnight market supports this premise as the rally we expected began even before the market closed on Wednesday as people were still voting, which was WELL BEFORE any evidence of a winner was even seen.

This is no different than my views presented back in 2016. Whereas many believed at the time that the market was going to crash, we were pounding the table that we expected a massive rally to 2600SPX+ (as the market was in the 2000 region at the time of the election) "no matter who won the election." As we now know, the market did surprise most market participants after a Trump win, and rallied to the 2880SPX region before we saw a larger correction, and exactly as we had predicted before the election.

Now, I want to caution you if you are going to attempt to still conclude that the market “knew” Trump was going to win, as it began the rally before the market even closed and as people were still voting. If you want to maintain that premise, then you must believe that the market is clairvoyant or omniscient. I do not believe in such preposterous premises.

In fact, studies have shown that even if you knew the news ahead of time, you often would get the direction of the market wrong.

In a 1988 study conducted by Cutler, Poterba, and Summers entitled “What Moves Stock Prices,” they reviewed stock market price action after major economic or other type of news (including major political events) in order to develop a model through which one would be able to predict market moves RETROSPECTIVELY. Yes, you heard me right. They were not even at the stage yet of developing a prospective prediction model.

However, the study concluded that “[m]acroeconomic news. . . explains only about one fifth of the movements in stock market prices.” In fact, they even noted that “many of the largest market movements in recent years have occurred on days when there were no major news events.” They also concluded that “[t]here is surprisingly small effect [from] big news [of] political developments. . . and international events.” They also suggest that:

“The relatively small market responses to such news, along with evidence that large market moves often occur on days without any identifiable major news releases casts doubt on the view that stock price movements are fully explicable by news. . . “

In August 1998, the Atlanta Journal-Constitution published an article by Tom Walker, who conducted his own study of 42 years’ worth of “surprise” news events and the stock market’s corresponding reactions. His conclusion, which will be surprising to most, was that it was exceptionally difficult to identify a connection between market trading and dramatic surprise news. Based upon Walker's study and conclusions, even if you had the news beforehand, you would still not be able to determine the direction of the market only based upon such news.

In 2008, another study was conducted, in which they reviewed more than 90,000 news items relevant to hundreds of stocks over a two-year period. They concluded that large movements in the stocks were NOT linked to any news items:

“Most such jumps weren’t directly associated with any news at all, and most news items didn’t cause any jumps.”

Rather, the more recent studies have been outlining that market psychology is a much more important determinative factor than news, economics or political developments. In a paper entitled “Large Financial Crashes,” published in 1997 in Physica A., a publication of the European Physical Society, the authors, within their conclusions, present a nice summation of the overall herding phenomena within financial markets:

“Stock markets are fascinating structures with analogies to what is arguably the most complex dynamical system found in natural sciences, i.e., the human mind. Instead of the usual interpretation of the Efficient Market Hypothesis in which traders extract and incorporate consciously (by their action) all information contained in market prices, we propose that the market as a whole can exhibit an “emergent” behavior not shared by any of its constituents. In other words, we have in mind the process of the emergence of intelligent behavior at a macroscopic scale that individuals at the microscopic scales have no idea of. This process has been discussed in biology for instance in the animal populations such as ant colonies or in connection with the emergence of consciousness.”

Now, for those that believe this article was written by someone who voted or supported Harris, you could not be further from the truth. Rather, I try to view the market through a prism of empirical truth no matter my political persuasion.

So, my perspective going forward is that we have support in the 5885-5940SPX region. As long as the next pullback holds that support, then we are going to next target the 6153SPX region. Should that support break in a sustained fashion, then we will be looking for confirmation that a major top may have finally been struck. But, make no mistake about it. We are likely approaching what could be a very long-term top once this rally completes.