Stocks: Why "Buying the Dip" is Fraught with Danger

Take a look at "a dip buyer's nightmare"

By Elliott Wave International

Investors know that the main U.S. stock indexes have tumbled very quickly.
On a historical basis, some may not realize just how quickly.
A March 23 Marketwatch headline referred to a "mind-bending stat":

The S&P 500 has dropped 30% from peak to trough faster than any other time in history. The next three fastest were all nasty pullbacks during the Great Depression era. Yes, just 22 days for this stock market to get cut by a third.

This historically swift downturn has prompted a "buy the dip" mentality.
On March 23, a prominent founder of a financial firm told CNBC:

"I'm nibbling right now, for what it is worth."

Other professional investors have also mentioned that they were doing a little nibbling of their own.
The sentiment expressed was that the market may have a little more downside to go, but that’s about it.
These professionals might turn out to be correct in their judgments of the market. Then again, just because stocks have fallen far and fast – doesn't mean they can't fall way farther.
As a historical lesson, let's take you back 19 years, when our April 2001 Elliott Wave Financial Forecast showed this chart and said:

"If there were ever a testament to the importance of market timing, the NASDAQ over the last year is it. Anyone who bought into the euphoria at the all-time high or the bull trap highs of early September and late January, would have taken successive hits of 40%, 47% and 38%. You can bet that many people followed the "buy" advice in the media on every bounce, losing even more than the "hold-only" loss of 65% from top to bottom."

Bear in mind, the NASDAQ continued to fall into October 2002, handing even deeper losses to investors who continued to buy on the way down.
Returning to 2020, only time will tell when the bear market has bottomed, if it hasn't already done so.
Yet, one thing's for sure even now: The Elliott wave model is offering its own clues about what's next for the main stock indexes.
See for yourself – 100% free.
You see, Elliott Wave International has just made available our entire "Stocks" section of our monthly Elliott Wave Financial Forecast to Club EWI members. Joining Club EWI is also free.
Elliott Wave International has been guiding investors through bull and bear markets since 1979. From that long experience, EWI’s analysts know that at certain market junctures, they can help the most by giving everyone their latest analysis free.
Now is one of those market junctures.
Read the Financial Forecast excerpt now, free.
This will help you understand how the markets got to this juncture -- and, more importantly what's likely next.
Also, please feel free to share this special excerpt with friends and family.
Again, simply follow this link:
Read the Financial Forecast excerpt now, free.

This article was syndicated by Elliott Wave International and was originally published under the headline Stocks: Why "Buying the Dip" is Fraught with Danger. 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.

This article was syndicated by Elliott Wave International and was originally published under the headline Stocks: Why "Buying the Dip" is Fraught with Danger. 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.

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Why Global Investors Should Pay Attention to "Non-Confirmations"

By Elliott Wave International

When a trend is strong, related markets tend to move in unison.
However, when a trend is near exhaustion -- a bullish or bearish trend, "non-confirmations" often occur. A non-confirmation occurs when one market makes a new high (or low), but a related market does not.
As cases in point, our November Global Market Perspective discussed the details of the non-confirmations in Europe as it showed two charts. Here's the first:

The Euro Stoxx 50, the DAX and the FTSE 100 (top three graphs) have so far failed to confirm new multi-year highs in the CAC 40 and the Swiss Market Index (bottom two graphs).

Here's the second chart with continued commentary:

The chart depicts [a] critical loss of juice in Britain's higher-beta indexes. Notice that while the FTSE 100 is off 6% since its May 2018 high, the Small-Cap index and the AIM 100 are down 9% and 23%, respectively. These non-confirmations are important, because markets almost always splinter when big changes in social mood are afoot. ... It's only a matter of time before the broad indexes abandon the bull-market party.

As we all know, abandon it they did -- big-time!
The media blamed the big plunge in global stock market values on the coronavirus.
Yet, it's notable that our global analysts' forecast for the end of Europe's "bull-market party" occurred about two months before the coronavirus flared up in China -- and six weeks before the outbreak hit Europe.
So, clearly, our bearish European forecast was not based on the coronavirus.
Elliott Wave International analysts base their financial forecasts on the Elliott wave model plus technical and sentiment indicators, not the news.
As the Wall Street classic Elliott Wave Principle: Key to Market Behavior by Frost & Prechter noted:

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. It is not propelled by the external causality to which one becomes accustomed in the everyday experiences of life. The path of prices is not a product of news. Nor is the market the cyclically rhythmic machine that some declare it to be. Its movement reflects a repetition of forms that is independent both of presumed causal events and of periodicity.

Now is the time to get insights into what really governs the path of stock market prices -- the Wave Principle.
You can do so by reading the online version of Elliott Wave Principle: Key to Market Behavior -- free. This free access to the Wall Street classic is available when you join Club EWI. Membership is also 100% free.
You can have this "must read" book on your computer screen in just moments. Get started.

You Won't Believe WHEN Pension Funds "Embraced Stocks as a Safe Investment"

By Elliott Wave International

Pension funds were already in a highly precarious position before the DJIA's February 12 high and the subsequent start of the high drama in stock moves.
The 2018 edition of Robert Prechter's Conquer the Crash noted:

The bull market in stocks has gone on so long that pension funds, formerly boasting conservative portfolios, have embraced stocks as a safe investment. ... This is a setup for disaster.

Fast forward to Nov. 5, 2019 when the Wall Street Journal said:

Public Pension Plans Continue to Shift Into U.S. Stocks

Discussing the same theme, our January 2020 Elliott Wave Financial Forecast showed this chart and said:

At the end of the third quarter, alternative investments such as private equity and who-knows-what made up 5.6% of [U.S.] public pension fund portfolios, a new record. At 47.3% in 2019, equities exceed the allocation at the stock market peak of 2007. " ... As in 2008, pension funds are doubling down. Once again, the strategy will prove a miserable failure.

Yes, deficit-plagued pension funds were nearly half invested in stocks -- just when the main indexes started to plunge a few weeks ago.
On March 9, the Guardian, a British newspaper, put a positive spin on pensions and the market's rapid downturn:

How badly has my pension been hit?

It's bad, but not as grim as the headline falls in the FTSE or Dow suggest. As a rule of thumb, for every 10% fall in the FTSE, the value of your pension investments falls by about 5% to 6%.

Well, whether one chooses to call it "bad" or "grim," one thing's for sure: the British and U.S. stock markets have fallen even more since that article published.
Many observers believe the coronavirus "triggered" the big plunge in stock values. However, you may be interested in knowing that the Elliott wave model pointed to a big decline in the equity market well before the coronavirus became widespread frontpage news.
As example, our January 2020 Elliott Wave Financial Forecast (published Jan. 10) said:

The new year has coincided with new highs in the Dow Jones Industrial Average, but key pieces of evidence indicate that the rally is at or very near an end. ... Now is the time to be prepared for a change of trend, which very few investors are currently anticipating.

Indeed, that "change of trend" did occur.
Now is the time to find out what EWI's analysts anticipate for the stock market in the weeks ahead.
Elliott Wave International has been guiding investors through bull and bear markets since 1979. From that long experience, we know that at certain market junctures, we can help the most by giving everyone our latest analysis free.
Now is one of those market junctures.
Elliott Wave International has just made the entire "Stocks" section of our flagship market letter, the monthly Elliott Wave Financial Forecast, available to all Club EWI members, free. Your membership in Club EWI is also free.
It's a rare opportunity to see what EWI's subscribers are reading.
Read the Financial Forecast excerpt now, free
This will help you understand how the markets got to this juncture -- and, more importantly what's likely next.
Also, please feel free to share this special excerpt with friends and family.
Again, here's that link:
Read the Financial Forecast excerpt now, free

This Will Signal the Bear Market's Halfway Point

By Elliott Wave International

On March 12, the date the DJIA closed lower more than 2350 points, the U.S. chief equity strategist for a major financial firm appeared on Bloomberg after the market close and opined that "90% of the damage has been done."
He went on to affirm that if an investor's time horizon is longer than two weeks, then yes, the stock market plunge represents a good buying opportunity.
Well, if that's the sentiment after the DJIA had shed more than 28% (through March 12), then the downturn may have ways more to go than just another 10%. In other words, such financial confidence is usually not the prevailing sentiment near the end of a bear market.
Now, granted, this was just one opinion... except, it isn't. The chief equity strategist's sentiment is just one example of an entrenched financial optimism.
As our March 11 Elliott Wave Theorist says:

As yet, fear is nowhere near epic. ... Relative to the size and breadth of the down days, TRINs have been remarkably low. All moving averages from 3 to 55 days are between 1.00 and 1.30, indicating nearly equal volume distribution in down stocks vs. up stocks. In other words, there has been no panic...

How do you know when a bear market is past its midpoint? Answer: when people stop cheering for lower prices.

A Bloomberg article reported, "Vanguard's VOO attracted nearly $4.2 billion so far in March." What is the VOO, you ask? It is an exchange-traded fund representing the S&P 500 that is "commonly used by retail investors." The phrase, "so far in March," means just over the past 7 trading days. Inflows in the down month of February were $8.3 billion. [The graph] tells you all you need to know: Each day, people think they are buying a low. When the real low arrives, they will be selling.

The scores of technical indicators that our analysts study are revealing a lot about the potential depth of the unfolding bear market.
Of course, our primary analytical tool is the Elliott wave model.
It tells us that, even though the market's recent dramatic behavior is rare, it is not unprecedented. Meaning, we can see one or more scenarios of how things will progress from here.
The good news is that you can access our latest Elliott wave analysis 100% free.
You see, Elliott Wave International has been guiding investors through bull and bear markets since 1979. From that long experience, EWI's team of experienced analysts know that at certain market junctures, they can help the most by providing their latest analysis free.
Now is one of those market junctures.
Elliott Wave International has just made the entire "Stocks" section of their flagship market letter, the monthly Elliott Wave Financial Forecast, available to all its free Club EWI members. It's a rare opportunity to see what EWI's subscribers are reading.
Read the Financial Forecast excerpt now, free
This will help you understand how the markets got to this juncture -- and, more importantly what's likely next.
Also, please feel free to share this special excerpt with friends and family.

Did the Oil Crash Wreck the Stock Market?

By Elliott Wave International

Crude oil took a 30% dive on Sunday, March 8. Yet what's happened in oil this year is so much bigger than that headline-grabbing, one-day move. In January, oil was $64 a barrel. It hit $27.34 intraday on Monday, March 9, so the price of oil fell 57% in just two months. Talk about a swift decline.
If you turn on your favorite financial news network, the odds are good that you'll find a pundit speculating about what this move down in oil means for stocks. To help us answer that question, let's go back to 1973. Economists will tell you that the 1973-74 bear market was due to the infamous OPEC oil embargo. The embargo is a real thing that happened from October 1973 to March 1974, and it's true that oil prices quadrupled over that time. But the stock market topped in January 1973. Stock prices had been falling for nine months before the embargo began, so the embargo cannot have caused the bear market in stocks. Plus, stocks continued to fall for nine months after the embargo was lifted, further destroying the embargo-caused-the-crash argument.
Although the data don't support economists' argument, let's consider the logic that underlies their argument for a moment. The embargo resulted in oil shortages and pinched household and corporate budgets, ostensibly exacerbating the bear market and pushing the economy into a recession. But if drastically rising oil prices are bad for stocks and the economy, then logic demands falling oil prices must be good for stocks and the economy. Yet oil collapsed 78% in 2008 during the worst of the bear market in stocks. And the recent price slide in oil has overlapped a global selloff in stocks.
So what's going on? The truth is that the correlation between stocks and oil swings willy nilly from positive to negative throughout history, as you can see on the chart. Pundits will try to use one market to predict the other, but the reality is that there's no reliable relationship between the two at all. To understand each market, you have to look at each market's Elliott waves.

Discover how Elliott waves can help you catch moves in the oil market when you watch a special video from EWI's chief energy analyst, Steve Craig, available to ClubEWI members. Sign up for FREE and watch instantly.

Before Sell-Off, This Indicator Posted Its "Largest 1-Day Jump" in 10 Years

A revealing perspective on the stock market… and the "unexpected"

By Elliott Wave International

Most investors are surprised when a big trend turn occurs in the stock market.
A big reason why is because most market participants tend to linearly extrapolate the current trend into the future. Indeed, instead of getting cautious as a trend persists, they tend to do the opposite and ramp up their expectations. This applies during both down- and uptrends.
Let's first look at an example when the stock market had been in a major downtrend. As you'll recall, the market's last major bottom occurred in March 2009. The then bear market had been going on for 17 months.
Just days before the bottom, these headlines published:

• Dividends Falling -- No Bottom in Sight (Seeking Alpha, Feb. 24, 2009)
• The Dow's Bearing -- 6,000 and Under (CNBC, March 2, 2009)

As you can tell, these headlines reflected expectations that the bear market would persist. Instead, March 2009 marked the "lift off" of the longest bull market in history.
Yes, big trend turns usually happen just when stock market expectations reach extremes.
Now, let's look at expanding bullish expectations, and not just among retail investors.
Our February 2020 Elliott Wave Financial Forecast showed this chart and said:

The chart shows a bullish surge within [a] class of investment professionals, research analysts. According to SentimenTrader, analysts upgraded price objectives on a net 169 stocks on January 7, which is the largest one-day jump in the ten-year history of the indicator. So, analysts are chasing the rally, too.

Of course, as we know, those "expanding expectations" were thoroughly dashed.
So, what are mainstream analysts saying now?
Well, here's a March 3 headline from a major financial publication (Investor's Business Daily):

You Just Got A Second Chance At 10 Top Stocks, Analysts Say

In other words, buy the dip.
These analysts may turn out to be right. Then again, we urge you to review what our Elliott wave experts expect next for stocks. See, instead of chasing market "fundamentals" -- which are almost always one step behind, bullish near tops and bearish near bottoms -- Elliott waves let you track the waves of investor psychology, the true driver of stock market trends.
You can get valuable insights into Elliott waves by reading the Wall Street classic book, Elliott Wave Principle: Key to Market Behavior, by Frost & Prechter.
You can now access the digital version of this Wall Street classic 100% free. Get access now.

This article was syndicated by Elliott Wave International and was originally published under the headline Before Sell-Off, This Indicator Posted Its "Largest 1-Day Jump" in 10 Years. 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.

Think the Fed's Emergency Rate Cut is Proactive? Think Again.

By Elliott Wave International

You might think that the Fed's recent, unscheduled 50 basis-point cut in the federal funds rate is a proactive move that places the central bank at the vanguard of revolutionary uses of monetary policy. But that could hardly be further from the truth.
For decades at Elliott Wave International, we've observed that the Fed simply follows the yield on short-term government debt. We say that "the Fed follows the market" because the freely traded bond market determines the yield on government debt. The yield on short-term U.S. Treasuries started falling in earnest in February, and in March the Fed aligned its target rate with the trend of the market. There's nothing radical or revolutionary about it. The Fed merely followed the market yet again. This chart shows the recent history.

Will the cut in the federal funds rate stem the bleeding in the economy? Will it halt the spread of the coronavirus? Will it have any impact on any financial market whatsoever? If you're learning to think like an Elliottician, then you already know that the answer to each of those questions is "no."
As Robert Prechter and his co-authors wrote in Chapter 3 of The Socionomic Theory of Finance:

The myths of central bank potency and interest-rate causality are so pervasive that conventional analysts cannot imagine a better explanation for trends in financial markets and the overall economy. But the interest-rate market is the dog wagging the central-bank tail, and neither of them determines risk preferences, stock prices or trends in the economy.

For most people, the idea that markets guide the decisions of central bankers rather than the other way around is counterintuitive. But no data show that financial prices change in reaction to administrative directives. On the contrary, these data expose the fact that administrators constantly monitor markets to decide what actions they should take.

Some theorists might try to argue that speculators in government debt are successfully anticipating central banks' policy moves and adjusting market rates on government bills ahead of central-bank announcements. This is a variation of discounting theory, which Chapters 7 and 39 heartily challenge with respect to stocks and the economy. With respect to interest rates, which scenario is more likely: that central banks follow the market with approximately a five-month lag, or that investors follow central banks' directives five months in advance? The latter claim would seem detached from reality on at least two counts: Prior to central-bank meetings, market observers and even trained economists typically express not foreknowledge but pervasive uncertainty about possible rate actions; and there is no evidence that central bankers know five months in advance what they themselves are going to do.

Read more of the myth-busting, causality-inverting, eye-opening chapter, "Central-Bank Policy Does Not Control Interest Rates; It's the Other Way Around," when you join ClubEWI for FREE. Sign up now and access it instantly.

Gold: Learn from the Actions of the "Smartest on Wall Street"

Deep-pocketed speculators miss the big turns -- but you don't have to

By Elliott Wave International

Hedge fund managers are considered to be among the smartest people on Wall Street.
Ironically, as a group, they're notorious for consistently being on the wrong side of major turns in the markets they trade. By contrast, a group of insiders called Commercials are generally on the right side of major market turns.
With that in mind, consider this commentary from the August 2015 Elliott Wave Financial Forecast, and note on the chart that hedge managers are synonymous with the term Large Speculators:

Large Speculators and Commercials hold a net-position size that is a multi-year extreme, and it is opposite to the position size held several weeks prior to gold's all-time high at $1921.50 in September 2011 and at gold's peak in October 2012 ... a sentiment that is consistent with a gold rally. Despite the possibility of near-term base-building, we still anticipate that the advance, when it starts, will last several months.

Indeed, in December 2015, gold hit a low of $1046.20 and then rallied to $1375.53 on July 6, 2016, a 31% increase.
A reversal followed which sent the price of gold to a Dec. 15, 2016 low of $1122.98.
At that time, as you might have guessed, sentiment had again turned decidedly bearish.
Here's a Dec. 29, 2016 Marketwatch headline:

2017 is the year gold drops below $1,000

Instead, however, gold started another climb. By Jan. 25, 2018, the price hit $1366.38, and the Daily Sentiment reading from trade-futures.com registered 91% bullish.
But, yet again, most big players were on the wrong side as gold began another slide.
By Aug. 16, 2018, gold hit a low of $1160.24. After the market closed on that date, our U.S. Short Term Update said:

Large Specs currently [hold] their second smallest net-long positions in 16 years at 3.5%.

In other words, 96.5% of deep-pocketed speculators were betting that gold's price would continue to decline.
But, if you've been an observer of the gold market, you know that the price of gold has not looked back since then.
Instead of trend following, Elliott Wave International's analysts use the Wave Principle to forecast the price behavior of widely traded markets, like gold.
The Elliott wave method not only helps traders to identify the main price trend, it also provides market participants with a high level of confidence in determining the maturity of a price trend.
Get important insights in the free report, "Learn How the Wave Principle Can Improve Your Trading."

This article was syndicated by Elliott Wave International and was originally published under the headline Gold: Learn from the Actions of the "Smartest on Wall Street". 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.