Sentiment Speaks: Setting Up For A Rally

I want to state at the start of this week's missive that my heart goes out to all those in Ukraine whose lives have been uprooted and displaced by this Russian invasion, along with all those families that have lost loved ones. So, please do not assume that any of my forthcoming comments are making light of the human suffering that is taking place in Europe. My forthcoming comments are simply outlining the inconsistencies in how news is reported relative to the stock market action.

Many market participants were quite certain that once Russia invaded Ukraine the market would continue dropping in earnest. And, many are still quite bearish for the same reason. But, those maintaining such perspectives have clearly not been burdened by the facts.

The fact is that Russia invaded Ukraine on February 24th and the market bottomed on the exact same day. In fact, the market rallied over 7% off the low struck on the day of the invasion, with 270 of the 302 points of that rally occurring within two days of the invasion.

What was almost comical was the manner in which the media reported this rally. On CNBC, for example, the headline early in the day on the 24th was "Dow rises 600 points as investors shake off intensifying Russia-Ukraine conflict, spiking oil."

Does that mean that the market likes war? Well, consider that the market began a multi-decade rally when World War II was raging. In fact, as WWII was raging around him, Ralph Nelson Elliott, the creator of the Elliott Wave Theory of tracking market sentiment (which is my primary methodology), made the following call:

"[1941] should mark the final correction of the 13 year pattern of defeatism. This termination will also mark the beginning of a new Supercylce wave (V), comparable in many respects with the long [advance] from 1857 to 1929. Supercycle (V) is not expected to culminate until about 2012."

For those that do not understand this, Elliott was forecasting a 70+ year bull market while WWII was raging around him. This has to be the best stock market prognostication in history, bar none.

What did Elliott see that allowed him to make such a boldly accurate prediction?

Well, he recognized that the stock market was driven by waves of public sentiment. And, that those waves of sentiment are fractally patterned. Therefore, as the market was striking a bearish extreme, it was time for it to turn in the opposite direction. And, yes, the fact that a world war was raging around him did not change his view of the market.

As Elliott noted at the time:

"Very extensive research in connection with . . . human activities indicates that practically all developments which result from our social-economic processes follow a law that causes them to repeat themselves in similar and constantly recurring series of waves or impulses of definite number and pattern. . . "

"The causes of these cyclical changes seem clearly to have their origin in the immutable natural law that governs all things, including the various moods of human behavior. Causes, therefore, tend to become relatively unimportant in the long term progress of the cycle. This fundamental law cannot be subverted or set aside by statutes or restrictions. Current news and political developments are of only incidental importance, soon forgotten; their presumed influence on market trends is not as weighty as is commonly believed."

So, it is absolutely foolish of me to say that war is good for the market, just like it is absolutely foolish for anyone to say that war is bad for the market. The empirical evidence suggests that the market really does not care. And, as hard as it is for many to accept or believe this, it is simply what the empirical historical data concludes. I can only go by what the empirical evidence suggests, so please do not challenge me with nonsensical comments below such as "what if the world is destroyed by a nuclear war?" If that is the case, are you really going to be concerned about your investments? So, let's please deal with this issue like realistic adults.

Moreover, I am also quite certain there will be some of you historians that will provide examples where the market was dropping when some conflict was raging. But, the fact that we have seen the market rally during times of other conflicts would support what I just concluded above.

As Robert Prechter outlined in his brilliant book The Socionomic Theory of Finance (which I suggest to anyone who wants to learn the truth of how markets work):

"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."

So, if you are going to view our markets from an intellectually honest perspective, you must grapple with the fact that the stock market rallied very strongly this past week as the Russians invaded Ukraine, which surprised every single person who believes that the substance of the news drives the market. And, I am sure there are some sharp cookies out there reading this article and who will attempt to "splain" why the market rallied in the comments section below. But, if you are being honest with yourself, such explanations will provide "logic" that is akin to scratching your right ear with your left hand by going over the top of your head.

This past week, we were granted another showcase of how the common intellectual dishonesty works with the NFP report as well. It really did not make a difference which way the market would have moved after the NFP report was presented, as the talking heads had it all figured out beforehand:

Good NFP report and market rallies = "The Economy Is Doing Well"

Bad NFP report and market rallies = "The Fed Will Back Off On Interest Raising"

Good NFP report and market drops = "The Fed Will Continue Raising Rates And Hurt The Market"

Bad BFP report and market drops = "The Economy Is Contracting"

While you may be chuckling at what I just presented, you cannot honestly tell me I am wrong.

When I presented a keynote address at the Moneyshow Traders Expo in Las Vegas last week, I tried to present a bit of a different picture as to what we should be focusing upon when it comes to the stock market:

I want to start my address by taking you back in time. I have been personally graced to be an inhabitant of this planet for just a bit over half a century. And, I have seen quite a lot in my time.

In 1970, the year in which I was born, the S&P 500 was sitting just below 100. Yes, you can check the charts later, but that is quite accurate.

And, I remember how much simpler life was. For those of you that were not alive then, we used to watch television with only a hand full of channels, and the television was in black and white.

I still fondly remember sitting on the floor with my sister in our living room in New York City, watching I Love Lucy re-runs on a black and white television set. I even remember watching football on the weekend with my father, and how he would yell at the television when the Jets would turn the ball over.

But the one thing that truly sticks out in my mind is that I remember how one of my older relatives would call the TV the "stupid box." I often wonder what he would think of the internet and social media today?

As technology progressed, I remember how excited I was when we got our first color television. Yes, my friends, color television was considered a luxury back then, especially being the son of a New York City cab driver.

Yet, the further we moved away from seeing the world on our television in black and white, the more that individuals within our society began to gravitate to seeing the real world in black and white. The more technology allowed us to see the pictures on the television in amazingly clear and vivid color, the more our friends and neighbors became polarized in seeing the world in black and white. And, I am not just speaking of politics. We see it in the market almost daily.

My friends, the world has a lot of grey, as well as many other colors if we are willing to open our eyes and minds to see it. Unfortunately, it seems we are too willing to hand over our ability to think and our ability to reason to that "stupid box."

So, I view it as my goal and job to make investors more aware about what is important to focus upon in the stock market, and what should be ignored. While many still love arguing with me with their unsupported "feelings" about the market, after growing to 67,000+ followers on Seeking Alpha, 8500 subscribers to our services, and approximately 1000 money manager clients, I would say that we have been quite successful in our endeavors. And, when subscribers say these types of things to us weekly, it truly reinforces the fact that we have been changing people's lives for the better by doing so:

"My advice to newbies is simple, turn off the fricken tv and quit listening to all the morons who are just trying to make money off you. Avi has been doing this a long time and has a really good track record!!"

"I used to listen to Jim Rodgers and other 'gurus' and my portfolio performance was lackluster. Then I joined EWT and now I'm printing money with 90% less stress."

"You have helped many, including myself, to change their lives for the better!"

In the meantime, I am going to give you just the basic parameters upon which you can focus for the coming weeks. Support in the market is in the 4170-4270SPX region. As long as this pullback holds that support (which I expect it will at this time), then the next target region to focus upon is the 4500-4600SPX region. Of course, I am leaving the greater detail in my analysis to the members of ElliottWaveTrader.  But, those are adequate parameters for long term investors over the coming weeks.

Even though we have been extremely accurate in our market prognostications for years, I would like to take this opportunity to remind you that we provide our perspective by ranking probabilistic market movements based upon the structure of the market price action, which tracks market sentiment. And, if we maintain a certain primary perspective as to how the market will move next, and the market breaks that pattern, it clearly tells us that we were wrong in our initial assessment.

But here is the most important part of the analysis: We also provide you with an alternative perspective at the same time we provide you with our primary expectation, and let you know when to adopt that alternative perspective before it happens. Clearly, our alternative perspective at this time is that if we break the support cited above, I believe we can drop to test the 4000-4050SPX region before the next major rally phase begins. But, I do not see this as the greater likelihood at this time.

As I have said many times before, this is no different than if an army general were to draw up his primary battle plans, and, at the same time, also draws up a contingency plan in the event that his initial battle plans do not work in his favor. It is simply the manner in which the general prepares for battle. We prepare for market battle in the same manner.

Those that have followed my analysis have been quite prepared for most of the market machinations we have seen over these last several years. As we were striking the lows back in March of 2020, I outlined that I expected a rally from the 2200SPX region to at least the 4000 region, with my ideal target being the 6000 region.

As the market rallied strongly off the 2192SPX actual low struck, we entered 2021 in the 3750SPX region. While many were looking for either the market to crash back down again or for a very large pullback, I noted in early 2021 that I was expecting the market to continue its rally to at least the 4600SPX region before we see a pullback. And, even before the market topped out around 4546SPX and began a pullback, I outlined my ideal target for that pullback in the 4170SPX region, to be followed by a rally up towards the 4900SPX region (with the ideal target I shared with our members being 4882SPX).

Well, the market pulled back right down to the 4170SPX region, and then rallied up to a high within 60 points of my ideal target. Now, again, even before the rally topped out, I outlined my expectation for the market to pullback to the 4400SPX region. But, as I explained to our members before the drop began, there was potential for us to drop as deep as the 4100SPX region, since that was the bottom of the major market pivot I had outlined on my larger degree charts. And, after this pullback completes, I have been noting that my next ideal target overhead is 5500SPX.

While I will never be able to tell you with certainty how the market will move in the coming weeks, months, and years, I present you with enough information to know where my primary perspective is wrong so that you can adjust in order to take account for the alternative situation. And, until such time that the market proves our primary perspective is wrong, we will continue to follow our primary perspective, which has been guiding us extraordinarily well for many years.

By now, I hope you recognize the difference in our analysis approach, other than the accuracy thereof. We strive to view the market, and utilize our mathematically based methodology, in the most objective and intellectually honest fashion as possible, no matter how crazy it may sound. Moreover, it provides us with objective levels for targets and invalidation. So, when we are wrong in the minority of circumstances, we are able to adjust our course rather quickly, rather than fighting the market like many others you may read. So, you will never hear from me that "the market got it wrong."