What to Expect at a Critical Market Point: End of a Wave 2 Rally

"Most investors are convinced that the bull market never went away."

By Elliott Wave International

The great game of Wall Street -- where huge amounts of money are at stake every trading day.
Many speculators play this game by watching for events outside of the stock market that they believe will "trigger" the next big move in prices.
However, the real driver of all those green up arrows and red down arrows is nothing more or less than investor psychology. This famous Kal's cartoon sums it up perfectly:

First investor: "I've got a stock here that could really excel."
Second investor: "Really excel?"
Fourth investor: "Sell?" -- and the crowd goes, "Sell, sell, sell!"
First investor again: "This is madness! I can't take it any more, good bye!"
Second investor: "Good bye?"
Third investor: "Buy?" -- and the crowd goes: "Buy, buy buy!"
As random and unpredictable as this cartoon makes it look, EWI's research reveals that investor psychology actually goes through similar phases during every market cycle. So, if you know the current psychological phase of the market, you can make a high-confidence prediction about the next phase.
This leads us to what we call Elliott waves, which are simply reflections of these psychological phases. In other words, each wave represents a set of investor attitudes, sentiments and behaviors during a specific phase of the market cycle.
The Wall Street classic book, Elliott Wave Principle: Key to Market Behavior, by Frost & Prechter, states:

... a knowledge of wave personality can be invaluable. Recognizing the character of a single wave can often allow you to interpret correctly the complexities of the larger pattern.

Specifically, EWI's analysts have observed that the stock market trend develops in five waves, while the reaction against it develops in three waves. So, in a bull market, expect five waves up, followed by a downward move of three waves. In a bear market, expect five waves down, with the upward correction occurring in three waves.
With all of the above in mind, consider these recent expressions of investor psychology. The news excerpts were compiled by the editors of our Elliott Wave Financial Forecast and shown in the March issue:

Do these positive investor sentiments seem odd in the face of the stock market volatility that occurred after the January 26 DJIA high?
Well, there is an explanation.
The March Financial Forecast said:

The bullish response to the market's decline is exactly what the Wave Principle suggests should occur at a trend reversal. Near the end of a second-wave rally in a bear market, Elliott Wave Principle by Frost and Prechter states that "investors are thoroughly convinced" that the bull market "is back to stay."

Yet, the third waves that follow second waves do convince investors that a bear market is underway. The reason is that third waves are broad, and usually generate high volume and big price moves.
At this point, the trend is unmistakable.
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This article was syndicated by Elliott Wave International and was originally published under the headline What to Expect at a Critical Market Point: End of a Wave 2 Rally. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

How This Classic Market Theory Can Warn You of Big Turns

Dow Theory non-confirmations attend the start of every big bear market

By Elliott Wave International

Dow Theory is a time-honored market analysis tool. Its name comes from Charles H. Dow, co-founder of The Wall Street Journal.
In fact, The Wall Street Journal provided a capsule summary :

Dow Theory holds that any lasting rally to new highs in the Dow Jones Industrial Average must be accompanied by a new high in the Dow Jones Transportation Average .... When the transport average lags, it can presage broader stock declines.

In the Wall Street classic Elliott Wave Principle, Frost and Prechter called Dow Theory the "grandfather" of the Wave Principle:

Both [the Wave Principle and Dow Theory] are based on empirical observations and complement each other in theory and practice.

Critics of the theory say it's no longer relevant. They argue that today's economy is less dependent on transportation and more on technology.
But EWI's analysts say this historical indicator is still highly useful to investors.
The Elliott Wave Theorist showed charts of two historic bear markets, and both sported dramatic Dow Theory non-confirmations. Here's the first one (N/C stands for non-confirmation):

You'll notice that in 1999-2000, the transports topped about eight months ahead of the Industrials. Starting in January 2000, the Industrials slid some 40% through October 9, 2002.

In 2007, the transport's peaked about three months before the Industrials. The 2007-2009 bear market was the worst since the Great Depression. The Dow Industrials lost 54%.
A Dow Theory non-confirmation does not accompany every stock market downturn, but the historical record shows that it does attend the start of every big bear market.
If you are prepared to take the next step in educating yourself about the basics of the Wave Principle -- access the FREE Online Tutorial from Elliott Wave International.
The Elliott Wave Basic Tutorial is a 10-lesson comprehensive online course with the same content you'd receive in a formal training class -- but you can learn at your own pace and review the material as many times as you like!
Get 10 FREE Lessons on The Elliott Wave Principle that Will Change the Way You Invest Forever.

This article was syndicated by Elliott Wave International and was originally published under the headline How This Classic Market Theory Can Warn You of Big Turns. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Will Rising Bond Yields Send Stock Prices Tumbling?

Conventional Wall Street wisdom says "rising rates are bad for stocks." Let's put that belief to a test.

By Elliott Wave International

One of the big financial news stories on April 24 was that the 10-year Treasury yield hit 3% for the first time since 2014.
The other big financial news story was that the DJIA closed 424 points lower on that day.
As you probably know, the conventional wisdom on Wall Street is that investors will sell stocks in favor of bonds when yields reach an attractive level. So, it's not surprising that many pundits blamed the DJIA's triple-digit decline on rising bond yields.
Here's a sample April 24 headline along with higher bond yield warnings from the past few months:

• Here's the threat to the stock market from rising bond yields (Marketwatch, April 24)
• Rising bond yields could win next round in battle with stock market (CNBC, Feb. 7)
• How Spiking Bond Yields Could Topple a Stock Market Rally (Bloomberg, Feb. 4)

But, is the conventional wisdom that says higher bond yields will send stocks lower correct?
Well, our research reveals that there is no consistent correlation between interest rates or bond yields and the stock market.
Take a look at these charts from Robert Prechter's 2017 book, The Socionomic Theory of Finance:

The book notes:

Figure 2 shows a history of the four biggest stock market declines of the past hundred years. The graphs display routs of 54% to 89%. In all four cases, interest rates fell, and in two of those cases they went all the way to zero. ... [Conversely, Figure 3 shows when stocks climbed as interest rates climbed].

[Yet,] there have been plenty of times when the stock prices rose and interest rates fell. It happened, for example, in the period from 1984 to 1987, when stock indexes more than doubled while interest rates fell by half, [as Figure 4 shows].

[Looking at Figure 5,]. there have also been times when stocks fell and interest rates rose, as in 1973-1974 when stock indexes dropped nearly in half as interest rates doubled.

So, you can see why it's folly to forecast the stock market based solely on the direction of rates. What’s more, this lack of "cause and effect" doesn't just apply to interest rates.
In fact, our research shows that there is not a single factor outside of the stock market itself that determines the trend of aggregate stock prices.
Elliott Wave Principle, the Wall Street classic book by Frost & Prechter, says:

Sometimes the market appears to reflect outside conditions and events, but at other times it is entirely detached from what most people assume are causal conditions. The reason is that the market has a law of its own.

We call that law the Elliott Wave Principle.
If you are prepared to take the next step in educating yourself about the basics of the Wave Principle -- access the FREE Online Tutorial from Elliott Wave International.
The Elliott Wave Basic Tutorial is a 10-lesson comprehensive online course with the same content you'd receive in a formal training class -- but you can learn at your own pace and review the material as many times as you like!
Get 10 FREE Lessons on The Elliott Wave Principle that Will Change the Way You Invest Forever.

This article was syndicated by Elliott Wave International and was originally published under the headline Will Rising Bond Yields Send Stock Prices Tumbling?. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.