Should You Follow The Common Thinking About This “Bull Market?”

As many of you may know, I read quite a number of articles discussing the stock market, as I want to maintain a pulse on the common views. And, sometimes I run across something that compels me to write an article. I would say that this is the driver for the current missive.

Allow me to quote something that I read, which I really think needs to be addressed:

"The efficient market hypothesis states that the market correctly prices all incoming information, and the future price move is a function of the new information. Thus, to predict the market moves you need to predict the future information. Looking at the charts is looking at history, and that's not very helpful. So, why even look at the chart, and the recent parabolic move, it doesn't matter. As long as the fundamental view of no imminent recession holds, the market is likely to move higher."

Now, I know that Seeking Alpha is a predominantly fundamental analysis website, and this is how many of you actually view the market. In fact, I remember when I was looking to begin writing on SA 13 years ago, and the Editor in Chief at the time was considering to not allow me to post articles due to the “technical” nature of my analysis. Well, since that time, I have grown to be the 3rd largest service provider out of 180+ services in the Investing Groups, have grown to 75,000+ followers, and have the 3rd largest number of followers on the platform. I guess it worked out well for all involved.

Now, to be honest, there is no way I could have grown to such an extent as an Elliottician on a fundamental analysis website unless I was proving that my method was as accurate – if not more accurate – than all the fundamental analysis being presented on the platform. In fact, I was “selling” just one thing – our accuracy – and not a fundamental story. Moreover, I was outlining market movements in both directions in all the markets I have tracked through the last 12+ years. And, as one of my members who has been with me for over 10 years recently noted:

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

So, now that I have laid the foundation of the long-term background of our work on SA, I want to spend the rest of this article discussing that paragraph I quoted above. Again, while I do understand that most of the readers here probably maintain the same perspective as the writer of that article, I sincerely hope you at least open your mind to what I am going to say, as it may be quite enlightening.

The first thing I want to address is the writer’s reliance upon the efficient market hypothesis. Anyone who has done any real in-depth work on the efficient market hypothesis usually comes to the conclusion that it is a preposterous and unworkable methodology in the real world. It is what is best viewed as an ivory-tower-type hypothesis, but does not have any true value in the real world, as it ignores the emotional/sentiment drivers in the market. Just reviewing the underlying assumptions within the hypothesis tells you that it is utterly ridiculous.

I really do not need to spend the next 20+ paragraphs being more specific about my statements above, as I have already picked this theory apart in a prior article. So, if you would like to read the specific analysis on this issue, please read the following article:

Let’s now move to the second sentence. Based upon the writer’s view regarding market analysis, “to predict the market moves you need to predict the future information.” My jaw nearly dropped when I read that statement. And, I was left in complete amazement.

I want to make sure I understand this statement. In order to predict market moves, one has to be clairvoyant in being able to predict “future information!?” Did I really read that?

Market studies have actually been conducted which completely refute this view.

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.” 

What is even worse is that even if one is lucky enough to accurately predict “future information,” they can still get the market direction completely wrong. And, we have all seen this happen more times than I can count.

I think the most glaring example is October 13, 2022. On October 12, many prognosticators were claiming that the CPI was going to come in hotter than the general market expected, which then lead to their view that the SPX is going to drop another 5%. I believe that Goldman Sachs was leading the charge with this view, and many others were publicly in agreement.

Now, as we all know, the CPI came in hotter than expected (Goldman was certainly right about this), but the market not only did not drop an additional 5%, but it bottomed that morning and began a 6% rally off the low THAT DAY. In other words, the market moved in the exact opposite manner than expected based upon the correct “prediction of future information.”

And, I could probably spend another 10+ pages outlining many more times we have seen these types of scenarios in the stock market. You all know them if you are being honest with yourselves, as they have probably left you scratching your head more times than you can count. Yet, you likely just shrugged it off, moved on, and just continued to view the markets in this same manner no matter how many times it failed you.

As Robert Prechtor wrote in The Socionomic Theory of Finance (a book I strongly recommend to every single investor out there, as it will open your eyes as to how the market truly works):

“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.”

As Mr. Prechtor further states in his seminal book:

“None other than the chairman of the Federal Reserve weighed in on this very topic in testimony before Congress. The morning after a one-day 3.3% swoon in the DJIA in 2007, “The nations top banker said he could not identify ‘a single trigger’ that caused Tuesdays dramatic drop.” This is a remarkable admission for a macroeconomic mechanist who advocates “financial engineering.” More recently, August 20, 2015 sported the biggest down day in 18 months for stock prices, yet reporters admitted there was a “lack of major U.S. economic news” to explain it.”

To this date, we still debate the cause of the Great Depression, the October 1987 market crash, the 2010 Flash Crash, the Asian financial crisis, and many other “anomalies” in the market. In 1997, a Nobel-prize-winning economist noted “The truth is that nobody really imagined that something like the Asian financial crisis was possible, and even after the fact there is no consensus about why and how it happened.”

As Mr. Prechtor appropriately further noted:

“Can you imagine physicists endlessly debating the cause of avalanches? . . . Economists are mystified over the causes of market declines and economic contractions because they are using a mechanical model in the realm of finance where it doesn’t apply.”

Again, if you are going to be honest with yourself, if you approach the overall stock market with a fundamental mechanical perspective, you know this describes you quite well. And, I know this because I used to be there myself. Allow me to explain my background and market approach before I began analyzing market sentiment.

I graduated college with a dual major in both economics and accounting. I went on to pass all 4 parts of the CPA exam in one sitting, something which only 2% of those taking the exam are able to achieve. I then went on to complete law school in two and a half years, and graduated cum laude and in the top 5% of my class. I then went on to NYU for a masters of law in taxation. I became a partner and National Director at a major national firm at a very young age, where I worked to organize very large transactions. So, when I tell you that I understand the fundamentals of economics, business, and balance sheets, you can believe me.

Yet, when I approached investing in the market with all this background of understanding businesses, economics and balance sheets, I was no better than the average investor, and sometimes even worse. It was not until I learned more about the psychology of the market that I began to learn how to maintain on the correct side of the market the great majority of the time. In effect, I had to ignore everything I learned about economics, businesses and balance sheets, and predominantly focus upon investor psychology in order to make more sense of market action.

It was not until this point that I started to realize how preposterous the Efficient Market Hypothesis was in real life due to its underlying illusory assumptions. It now reminds me of a joke a friend of mine told me about economists:

Two economists fell into a 20-foot ditch. As they looked around for a way out, they each attempted to climb out of their predicament, but to no avail. After struggling for a way out for about 15 minutes, a newly found excitement regarding a perceived solution came upon the face of one of the economists. He then turned to his compatriot, and proclaimed in excitement: “I figured a way out. Assume a ladder!”

Nuff said.

Let’s move on to the proclamation that charts are useless. Well, let’s turn this on its head first. I would say that the fundamental “recession” narrative has been useless and kept many bearish over the last 14 months. And, admittedly, the writer of the paragraph above maintained a bearish perspective throughout 2023. In fact, anyone following that perspective remained bearish during 2023, and missed a 1300-point rally off the October 2022 low. So, I think the appropriate view is that people that live in glass houses should not be throwing stones, especially when charts have been much more instructive and accurate.

You see, the “charts” told me to expect a bottom at 3500SPX, with an expectation for a rally from there to 4300-4505SPX, at which point I was going to re-assess. After we reached that target, I went neutral and expected the market to decline. But, the market did rally a bit higher to 4607SPX before that decline began. As that decline was completing into the 4100SPX region, we outlined our expectation for a rally from there to the 4350-4475SPX region. And, all of my expectations were admittedly based upon a VERY conservative view of the market, at least until the market was able to break out over 4607SPX again, which would then open the door to 5000SPX.

Moreover, this was all based upon our analysis of market sentiment, as we read it based upon charts. Yes, those “useless and unhelpful charts” indeed.

So, I guess if one really does not understand how to use charts, then they would come to the same conclusion as the writer that “charts are not very helpful.” But, when used appropriately, there is a lot one can learn from the market. Again, this is the only reason we have become as largely followed as we have on Seeking Alpha, and have 8000 subscribers to our services and almost 1000 money manager clients.

If you would like to learn more about our methodology, I wrote a six-part series on the basics of our Fibonacci Pinball method of Elliott Wave analysis a number of years ago:

Now, after missing the last 1300-points to the upside over the last 14 months, the writer of the paragraph quoted above has recently turned bullish. And, to be honest, I can still view some bullish moves left to the upside in the market. Yet, I am now beginning to turn cautious.

Nevertheless, history suggests that this writer will likely remain bullish despite the market transitioning into a bearish posture. And, this is quite typical.

In a paper written by Professor Hernan Cortes Douglas, former Luksic Scholar at Harvard University, former Deputy Research Administrator at the World Bank, and former Senior Economist at the IMF, he noted the following regarding those engaged in the analysis used by this writer for predictive purposes:

“The historical data say that they cannot succeed; financial markets never collapse when things look bad. In fact, quite the contrary is true. Before contractions begin, macroeconomic flows always look fine. That is why the vast majority of economists always proclaim the economy to be in excellent health just before it swoons. Despite these failures, indeed despite repeating almost precisely those failures, economists have continued to pore over the same macroeconomic fundamentals for clues to the future. If the conventional macroeconomic approach is useless even in retrospect, if it cannot explain or understand an outcome when we know what it is, has it a prayer of doing so when the goal is assessing the future?”

And, I have written an article which explains exactly why from a sentiment perspective:

So, I hope I have enlightened many of you to a new perspective on how to view markets. Again, I began my investing career, as have many of you, by focusing on fundamental analysis when it comes to markets. However, it was only when I discovered the implications of market sentiment did I begin to make sense of market movements, and even be able to predict changing trends, despite the views by most to the contrary.

Avi Gilburt is founder of