"Junk" Is Hot Again -- Despite Warning Signs

 

Default rates of low-grade corporate debt are rising

By Elliott Wave International

The demand for junk bonds is running high among global investors -- again.

As the Wall Street Journal noted on June 9:

Europe's riskiest corporate debt has rallied to pre-crisis levels.

Elliott Wave International's July Global Market Perspective, a monthly publication which covers 40-plus market worldwide, showed this chart and said:

The Bloomberg-Barclays Pan-Europe High Yield Total Return Index has retraced nearly 80% of its prior drop. Accordingly, the spread between European junk bonds and government debt narrowed to its lowest level since March 6, 2020. "When deals have come in the high-yield market in Europe, they have been well received," notes one credit strategist with JP Morgan Chase.

Yet, here's what's noteworthy: Global investors are swooping up risky corporate debt despite the fact that they've been warned of possible impending hazards.

As the July Global Market Perspective goes on to say:

[A] symptom of pervasive complacency is that investors are snapping up junk bonds despite a widespread understanding that default rates will skyrocket. According to estimates by S&P Global, the default rate for European speculative-grade corporates will hit 8.5% by March 2021, a three-fold increase from today's rate. In the United States, Moody's Investors Service expects the trailing 12-month default rate to hit 11.1% by March 2021. Goldman Sachs puts the percentage higher still -- at 13% before the end of 2020. More important, default rates are rising despite the concerted attempt by worldwide central banks to backstop the market. In April, the U.S. Fed began to purchase the debt of so-called fallen angels, which are companies that lost their investment-grade rating during the pandemic. The European Central Bank is about to follow suit. In June, ECB official Olli Rehn told reporters that he was keeping an open mind about implementing the same policy.

Junk bonds are issued by companies with the weakest balance sheets. Investors' claim on assets in the case of bankruptcy is usually next to the bottom rung, one notch above equity holders.

But, because the trend in junk bonds often aligns with the trend in equities, when stocks rise, indicating increasing appetite in "risk assets," so do the prices of junk bonds.

Of course, this also suggests that junk bond investors everywhere should be highly interested in the trend of global stock markets.

Elliott Wave International's analysts also cover other financial markets and economies worldwide.

Indeed, EWI has put together a free resource titled "5 Global Insights You Need to Watch."

Specifically, EWI's top 5 global experts share their latest forecasts for cryptocurrencies, crude oil, interest rates, deflation, and the future of the European Union.

It's all in a short, 5-video series (plus, two quick reads). In just 13 minutes, you get insights into markets and factors that can have a major impact on your investments.

These are the kind of insights only Elliott wave analysis can give you.

And -- you get it free with a fast Club EWI signup. Club EWI is the world's largest Elliott wave educational community and membership is also free.

Get started by following this link: "5 Global Insights You Need to Watch."

This article was syndicated by Elliott Wave International and was originally published under the headline "Junk" Is Hot Again -- Despite Warning Signs. 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.

Why Commercial Real Estate is Set to Get Slammed

 

By Elliott Wave International

Commercial real estate investors are in an especially precarious position should another financial crisis unfold.

A July 18 Marketwatch article titled "The open secret in commercial real estate is that owners regularly take cash out of properties ..." says:

Borrowers, ahead of this [year's] downturn, pulled more equity out of U.S. commercial buildings than ever before. ...

Debt relief conversations already started in April ... between the hardest-hit commercial property borrowers and their lenders.

Since then, delinquent commercial mortgage-backed securities loans have climbed to nearly 10%, rivaling the worst levels of the global financial crisis [in 2007-2009].

The National Association of Real Estate Investment Trusts estimates that the value of U.S. commercial real estate is around $16 trillion (2018).

Indeed, as this April 2020 chart from Forbes shows, U.S commercial property prices have more than doubled since their 2009 low:

Moreover, commercial real estate loans at U.S. banks surged by $863 billion or 62% since 2012.

So, if commercial mortgage-backed securities loans delinquencies already exceed the levels of more than a decade ago, imagine the scenario if "another shoe drops."

Relatedly, trouble is also brewing in the residential real estate market.

In June, ABC News reported:

Existing home sales plunge 9.7% in 3rd straight monthly drop

Elliott Wave International's analysts have been discussing what this likely means for U.S. housing prices.

And, getting back to the phrase about "another shoe dropping" in the financial system, Robert Prechter's 2018 edition of Conquer the Crash discusses what happens when debt levels become unsustainable:

The ability of the financial system to sustain increasing levels of credit rests upon a vibrant economy. At some point, a rising debt level requires so much energy to sustain -- in terms of meeting interest payments, monitoring credit ratings, chasing delinquent borrowers and writing off bad loans -- that it slows overall economic performance. A high-debt situation becomes unsustainable when the rate of economic growth falls beneath the prevailing rate of interest on money owed and creditors refuse to underwrite the interest payments with more credit.

When the burden becomes too great for the economy to support and the trend reverses, reductions in lending, borrowing, investing, producing and spending cause debtors to earn less money with which to pay off their debts, so defaults rise. Default and fear of default prompt creditors to reduce lending further. The resulting cascade of debt liquidation is a deflationary crash. Debts are retired by paying them off, "restructuring" or default. In the first case, no value is lost; in the second, some value; in the third, all value. In desperately trying to raise cash to pay off loans, borrowers bring all kinds of assets to market, including stocks, bonds, commodities and real estate, causing their prices to plummet. The process ends only after the supply of credit falls to a level at which it is collateralized acceptably to the surviving creditors.

Indeed, deflation is one of the topics discussed in Elliott Wave International's free resource: 5 Global Insights You Need to Watch.

You see, we asked our top 5 global experts to share their latest forecasts for cryptocurrencies, crude oil, interest rates, deflation, and the future of the European Union.

The result is this short, 5-video series (plus, two quick reads). In just 13 minutes, you get insights into markets and factors that can have a major impact on your investments.

And -- you get it free with a fast Club EWI signup. Club EWI is the world's largest Elliott wave educational community and membership is also free.

Just follow this link for free access to 5 Global Insights You Need to Watch.

This Chart Foretold Wirecard's Collapse -- Two Years Ago

 

While the scandal served as catalyst for the fire, the match was lit a long time ago

By Elliott Wave International

"Catastrophic Failure" -- June 18 CCN

"Swift, Spectacular Implosion" -- June 25 Alijazeera.com

"Doomsday" -- June 18 Seeking Alpha

These are a few descriptions for Munich-based Fintech firm Wirecard, whose recent epic fall from grace is one of the biggest financial bombshells in Germany's history. This chart captures the stock's crater-making crash in June -- from 104 euros per share, to ONE single euro.

10 out of 10 mainstream experts say the catalyst for Wirecard's crash was the June 19 revelation that nearly $2 billion in supposed profits had mysteriously vanished from the company's balance sheet. (If it was ever there to begin with). Dubbed the "Enron of Germany" by a June 29 CNBC article, Wirecard's scandal led to the firing of its CEO, a bankruptcy filing, and a $4 billion IOU-zilla issuance to creditors.

Surmised the June 25 Reuters:

"The collapse of Wirecard, once one of the hottest fintech companies in Europe, dwarfs other German corporate failures. It has shaken the country's financial establishment ... A scandal like Wirecard is a wake-up call that we need more monitoring and oversight than we have today."

True, except there has already been more than one "wake-up call" -- as early as two years ago.

Back on January 23 -- of 2018 -- one news source revealed how Wirecard was well-known for "making highly unusual purchases," using "adjusted metrics to inflate the appearance of earnings," and skirting a 7-month long investigation into a deal that saw 175-285 million euros missing from the company's coffers, leaving the sellers unpaid.

Yet, as that same article observed, these dubious episodes didn't stop investors from "still placing their faith -- and money -- behind Wirecard."

The ultimate show of that faith came in August 2018 when the green startup from a tiny Bavarian town known for beer gardens and bird-watching unseated Germany's second-largest bank, 150-year old Commerzbank, from Germany's venerable DAX stock market index.

And then came the latest Wirecard scandal, which supposedly "caused an 80% plunge in the company's stock price over the last two days." (New York Times, June 19)

All of which begs the question: Why did investors, after backing up Wirecard's dubious practices for years, suddenly lose faith in the company?

And was there a way to foresee that change of heart?

Our friends at Elliott Wave International believe the answer is yes -- and it comes down to investor psychology, or social mood.

Wrote Elliott Wave International's President Bob Prechter in his New York Times best-selling book Conquer the Crash:

"When the social mood trend changes from optimism to pessimism, creditors, debtors, producers and consumers change their primary orientation from expansion to conservation."

"Conservation" for investors manifests as doubt in the worth of a stock. Adds Prechter:

"People seem to take for granted that financial values can be created endlessly seemingly out of nowhere and pile up to the moon. Asset prices rise because those transacting agree that their prices should be higher...

"Conversely, for prices of assets to fall, it takes only one seller and one buyer who agree that the former value of the asset was too high. If no other bids are competing with that buyer's, then the value of the asset falls, and it falls for everyone who owns it."

The visible result of this shift in psychology occurs on a market's price chart, as specific Elliott wave patterns.

Thus, one month after Wirecard became the DAX's #2 stock, Elliott Wave International's September 2018 Global Market Perspective warned that, once the extreme optimism surrounding the fintech sector reached a peak, the mania's "soaring valuations and ever-accelerating growth forecasts" would reverse and the entire industry would experience a "a catastrophic sell-off."

From there, Wirecard's meteoric rise reversed with shares plunging 50% into March of 2019. Officials stepped in to stem the decline with an unprecedented single-stock ban on short selling.

Elliott Wave International's March 2019 Global Market Perspective foresaw the futility in such "Draconian measures" and showed this chart of Wirecard.

You can see that a five-wave rally into the 2018 peak was complete, marking a reversal in investor psychology -- and the next move would see a "downward spiral."

March 2019, Elliott Wave International's Global Market Perspective:

"Catastrophic" was exactly how the media described the selloff that followed:

But as you can see, from an Elliott wave perspective and the independent analysis of Elliott Wave International's Global Market Perspective, the writing was on the wall nearly TWO years before the June 2020 scandal.

The best part, our friends at Elliott Wave International have just alerted us to their July 23-30 Global Opportunities FreeWeek. This 7-day event invites you behind the paywall with instant access to their July 2020 Global Market Perspective -- and other free forecasts for 50+ most-watched global markets.

To join Elliott Wave International's Global Opportunities FreeWeek, all you need is a free Club EWI password. Take 30 seconds to get one now and on July 23-30, read their forecasts free. (No catch, and no credit card is required.)

If you're already a free Club EWI member, simply click here for instant access to Global Opportunities FreeWeek.

This article was syndicated by Elliott Wave International and was originally published under the headline Wirecard Goes from $24 Billion to Bust: A "Wake-Up Call" Two Years in the Making. 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 Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years"

Here's what happened "the last time the 10-day put/call ratio made a lower extreme"

By Elliott Wave International

After a big trend reversal, it's not unusual for the correction to retrace much of the initial sell-off or rally.

Thus, many investors are fooled into believing that the old trend has resumed.

This quote from the Elliott Wave Financial Forecast, a monthly publication which provides analysis of key U.S. financial markets, explains how this phenomenon often plays out in bear markets:

Conditions at the [first countertrend rally] high often seem as good if not better than they were at the bull-market peak. This is certainly how investors feel now, as the sentiment figures attest. Surveys show nearly as many bulls as they did at the [bull market] high.

No, this quote is not from 2020, but from the April 2000 issue of the Financial Forecast.

At the time, the stock market was in the early phase of a big bear market.

There's a good reason for bringing this subject up now in mid-2020.

This July 19 CNBC quote provides insight:

Bullishness among investors with $1 million or more in a brokerage account they self-manage was up 13% from last quarter, according to the latest E-Trade Financial investor survey, from 41% to 54%.

And, our July 15, 2020 U.S. Short Term Update provides another perspective on investor sentiment. Here's a chart and commentary:

The 10-day CBOE equity put/call ratio is at .441. Not only is this a new extreme for the rally, exceeding also the peak reading at the February 19, 2020 top, but it's the lowest 10-day average in nearly 20 years. The last time the 10-day p/c [ratio] made a lower extreme (.418) was on September 7, 2000...

Now, do understand that sentiment extremes can become even more extreme. That's another way of saying that the CBOE equity put/call ratio is not a precise investment timing indicator.

However, sentiment extremes are useful in putting investors "on notice" to pay close attention to the market's Elliott wave pattern, which does offer more precision.

As the Wall Street classic book, Elliott Wave Principle: Key to Market, states:

Although it is the best forecasting tool in existence, the Wave Principle is not primarily a forecasting tool; it is a detailed description of how markets behave. Nevertheless, that description does impart an immense amount of knowledge about the market's position within the behavioral continuum and therefore about its probable ensuing path. The primary value of the Wave Principle is that it provides a context for market analysis. This context provides both a basis for disciplined thinking and a perspective on the market's general position and outlook. At times, its accuracy in identifying, and even anticipating, changes in direction is almost unbelievable.

You can learn how to use the Elliott wave model.

It's as simple as reading the online version of Elliott Wave Principle: Key Market -- 100% free.

The way to gain instant and free access is to join Club EWI -- which is an Elliott Wave International educational community. Membership is also free and offers benefits.

Besides free access to Elliott Wave Principle: Key to Market Behavior, you'll also be able to tap into trading, investing and financial markets insights -- straight from Elliott Wave International's team of analysts.

Go for it!

Just follow this link: Elliott Wave Principle: Key to Market Behavior.

This article was syndicated by Elliott Wave International and was originally published under the headline This Stock Market Indicator Reaches "Lowest Level in Nearly 20 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.

Gold and Oil: Be Aware of the "Spike"

"Hope and fear look different on a chart"

By Elliott Wave International

Recently in these pages, we noted that bull markets in stocks tend to end with "a subtly slowing ascent" rather than with a final "spike" higher, as many investors believe. Historical examples were provided.

It was also pointed out that, by contrast, commodities do tend to end major uptrends with a price spike.

The Wall Street classic book, Elliott Wave Principle: Key to Market Behavior, by Frost & Prechter explains why (keep in mind regarding the quote from the book that fifth waves are the final wave in the main trend of a financial market):

Fifth wave advances in the stock market are propelled by hope, while fifth wave advances in commodities are propelled by a comparatively dramatic emotion, fear; fear of inflation, fear of drought, fear of war. Hope and fear look different on a chart, which is one of the reasons that commodity market tops often look like stock market bottoms.

Crude oil offers a prime historical example. This chart shows the big spike higher going into the July 2008 high. A dramatic 78% plunge in just five months followed:

Of course, precious metals are also commodities. Thus, the price history of gold offers another historical example of a price spike going into a peak.

This chart and commentary are from the Sept. 2, 2011 Elliott Wave Financial Forecast, a monthly publication which provides analysis of major U.S. financial markets:

Commodity fifth waves in major rallies often end in a final spike higher. ...

Gold's wave structure is consistent with a terminating rise.

Four days after that chart published, on Sept. 6, 2011, a headline in the British newspaper, The Guardian, said:

Gold hits new high as fear stalks financial markets

There we have that word "fear" again.

On that date, the yellow metal hit a high of $1921.50 and a big decline followed. By December 2015, gold was trading at $1046.20.

Now, let's return to the topic of crude oil -- a market that's seen extraordinarily dramatic moves in 2020, as you probably know.

This chart from the April 2020 Elliott Wave Financial Forecast shows when Elliott Wave International's analysts made key calls on the crude oil market in recent history:

You can see the junctures at which the Elliott Wave Financial Forecast and the U.S. Short Term Update prepared Elliott Wave International's subscribers for declines.

As the April Elliott Wave Financial Forecast noted:

The chart shows crude oil's recent plunge. When we've felt the time was right to make comments on oil's prospects, we've done so, as shown on the chart. Our last comment was in December 2019. Since January of this year, oil futures have crashed 71%.

Of course, the volatility in the crude oil market continued thereafter.

How would you like to get insights into the "forecasting tool" which EWI's analysts employ?

You can do so -- 100% free -- via a valuable resource titled "The Forecasting Tool That Called Every Major Turn in Crude Oil Since 1993."

Simply join Club EWI (membership is also free) and this video becomes instantly available to you. Club EWI is the world largest Elliott wave educational community.

Get started by following this link: "The Forecasting Tool That Called Every Major Turn in Crude Oil Since 1993."

This article was syndicated by Elliott Wave International and was originally published under the headline Gold and Oil: Be Aware of the "Spike". 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.

Here's Why You Can Forecast Markets Just by Looking at Chart Patterns

Here are two illustrations of the fractal form of financial markets

By Elliott Wave International

Nature is full of fractals.

Fractals are self-similar forms that show up repeatedly. Consider branching fractals such as blood vessels or trees: a small tree branch looks like an approximate replica of a big branch, and the big branch looks similar in form to the entire tree.

Fractals also form in the price charts of financial markets, at all degrees of trend, in both up- and downtrends. In fact, without knowing the time or price labels, you can't tell if you're looking at a 2-minute chart, a daily chart -- or a yearly one.

Fans of Elliott wave analysis have been using this information to their advantage for decades. Our March 2020 Elliott Wave Theorist gave subscribers two important real-time examples of fractals at work. Here's the first one along with the commentary:

This figure offers a good illustration of the fractal nature of markets. It shows the correction in T-bond futures of 2016-2018 on a weekly chart against the correction in the last four months of 2019 on a daily chart. They look quite similar, and each one led to a run to new highs.

And here's the next example, along with commentary from the March Theorist:

This figure shows another example of the market's adherence to forms. The top graph shows the 10-minute range for the S&P futures contract on March 4, and the bottom graph shows the same for March 5. Don't they look similar?

In fact, however, the trend of the market in the top graph was up, and the trend shown beneath it was down. We simply inverted the bottom graph for our illustration. Prices rose on March 4, and they fell on March 5, in the same pattern.

Here's what this means for investors and traders: The fact that price charts unfold in repetitive and recognizable patterns makes financial markets predictable.

As Elliott Wave Principle: Key to Market Behavior by Frost & Prechter noted:

Scientific discoveries have established that self-similar pattern formation is a fundamental characteristic of complex systems, which include financial markets. Some such systems undergo "punctuated growth," that is, periods of growth alternating with phases of non-growth or decline, building into similar patterns of increasing size.

Learn more about these self-similar pattern formations and how they can help you to anticipate turns in widely traded financial markets, including the stock market.

You can do so by reading the online version of Elliott Wave Principle: Key to Market Behavior, 100% free.

All that's required is a Club EWI signup. Club EWI is the world's largest Elliott wave community and allows you access to a wealth of Elliott Wave International's resources on investing and trading. Club EWI membership is also free.

Just follow the link to start reading the Wall Street classic book, Elliott Wave Principle: Key to Market Behavior.

This article was syndicated by Elliott Wave International and was originally published under the headline Here's Why You Can Forecast Markets Just by Looking at Chart Patterns. 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.

Seeking Certainty in Uncertain Times? Draw a Trendline -- Learn How

By Elliott Wave International

Elliott Wave International's online trading course teaches traders how to identify, draw, and use trendlines to seize high-confidence set-ups in any market, on any time frame -- Now FREE through July 14!

---

Today, the lines between what life looked like before the global pandemic of 2020 -- and what it'll look like after -- seem forever blurred. Will we have the same job? Will our formerly college-bound children ever leave the house? Will we even live in the same state, or the same country?

Being a trader in times like these, even if only as a fallback option, is not a bad idea.

If that thought has crossed your mind, how would you like to learn a simple technique to identify new trading opportunities?

That technique is drawing trendlines. Elliott Wave International's trading instructor Jeffrey Kennedy says:

"Trendlines are the simplest and most effective analytical tool traders can apply, be it to a stock, currency, or commodity."

"They're more effective than people realize."

"And so simple, a kid with a ruler can use them."

Hey, just think! You can add trendline drawing to your child's at-home school curriculum...

But seriously, folks! There is a reason why Elliott Wave International is bringing back Jeffrey Kennedy's popular online course "How to Use Trendlines to Spot Reversals and Ride Trends" now.

Today, millions of people around the world are turning to trading at home for the first time. The search for guidance is at an all-time high. If you're one of them, or even if you're an experienced trader, this course is for you ... and you can take it today 100% free. (More on that below.)

But first -- trendlines are simple straight lines connecting two price extremes on a chart. When you draw more than one, you create a so-called trend channel and see both the future trend and trend reversals.

Simple? Yes. And the results can be impressive.

Here's a real-life example from Elliott Wave International's Trader's Classroom, which Jeffrey Kennedy edits: Tesla Motors, Inc. (TSLA).

Tesla's shareholders are used to the fact that the company's CEO Elon Musk can be a loose cannon, prone to unpredictable behavior like performing a striptease at a new model launch in China.

But in his November 21, 2019 Trader's Classroom -- before TSLA zoomed above $1000 -- Jeffrey showed how simple trendline analysis made the coming rally quite predictable:

"We've gotten above the upper boundary line of the developing base channel."

"I think we're going to see a run on say 475-500" by the end of 2019."

"This is a 'very confident buy-side opportunity.'"

From there, TSLA rocketed 60% in December and January to new all-time highs:

Today, as you know, TSLA is an investor darling, with prices hovering well above $1000.

But what got the rally started -- before most people would look twice at the stock -- was a simple bullish trendline break.

"How to Use Trendlines to Spot Reversals and Ride Trends" gives you 90+ minutes of trading lessons that teach you how to effectively use this tool.

You'll learn how to:

• Quickly identify a trend -- up, down or sideways
• See if investor psychology is supporting the trend
• Define critical support and resistance levels for tight risk management
• See when a correction is over and the trend is resuming

Most importantly, you'll learn to recognize when a new opportunity is REAL or "fake."

AND HERE'S THE BEST PART ... THIS COURSE IS FREE!

Through July 14, you can take Jeffrey Kennedy's online trading course, "How to Use Trendlines to Spot Reversals and Ride Trends," 100% free as a member of Elliott Wave International's Club EWI.

Club EWI really is free -- there is no fee or credit card required to join its 350,000+ online members.

All you need is 30 seconds to get a free Club EWI password -- and you can take the trendlines course instantly.

By the way, at Elliott Wave International's online Store, this course sells for $79. So, don't miss this free opportunity to learn a useful skill. Take this online course now, FREE.

Stock Market: "Relevant Waves Vs. Irrelevant News"

Let's (again) delve into the connection between the stock market and news

By Elliott Wave International

The stock market is a fractal -- i.e., a self-repeating form at all degrees of trend. Meaning, without the time or price labels, you can't tell if you're looking at a 2-minute chart or at a monthly one.

What's more, stock market trends unfold in repetitive and recognizable price patterns.

What's more, these patterns -- Elliott wave pattens -- emerge regardless of the news.

Yes, there may be very brief reactions to news, but then the main trend continues. That's because the larger stock market trends aren't driven by the news, they are driven by market participants' bias, bullish or bearish. What we call, market psychology.

That's why you often see headlines with the word "despite" in them -- like, "Stocks rally despite U.S. unemployment at the highest level since the Great Depression," or "Stocks fall despite stronger-than-expected consumer confidence report." That word, "despite," tells you everything you need to know.

Review Part I and Figures 1 through 5 in Chapter 12 of Robert Prechter's 2017 book, The Socionomic Theory of Finance, and you'll see evidence that the market is not priced according to external conditions.

And, here's what the book says about those brief reactions:

Evidence for even temporary emotional reactions in markets is surprisingly suspect. All market observers have seen futures prices gyrate more intensely for a few seconds or minutes before and/or after an announcement perceived as major news. However, ensuing market movement may be totally opposite to the tenor of such news, even when it is a total surprise.

This quote came to mind when, on June 29, this sobering news appeared on a major financial website (CNBC):

Nearly half the U.S. population is without a job, showing how far the labor recovery has to go

The employment-population ratio -- the number of employed people as a percentage of the U.S. adult population -- plunged to 52.8% in May, meaning 47.2% of Americans are jobless.

Interestingly, on that very day, the DJIA closed up 580 points.

Plus, as you know, the stock market has bounced back substantially since the March lows, despite a historic slew of negative news.

Indeed, the June Elliott Wave Theorist, a monthly publication which has offered subscribers analysis of financial markets and cultural trends since 1979, showed this chart and said:

The first reports of economic contraction came out in March and continued through May. ... Stock prices not only rose for seven weeks but also jumped higher on nearly every report of a rise in unemployment claims. A particularly big up day occurred when statistics suggested an increase in employment, but analysts quickly recognized that the numbers were untrustworthy due to restrictions in data collection deriving from the pandemic. No matter; stocks went up the next day, too.

In fact, you can also see that the stock market rose more than it fell when Covid-19 dominated the headlines! It also rose on the day of the first protests -- and continued to climb for two weeks, despite the vandalism, looting and clashes between protestors and police not seen in decades.

The real driver of the stock market's trend is investor psychology, which Elliott waves reflect.

As the book, Elliott Wave Principle: Key to Market Behavior, notes:

The Wave Principle is governed by man's social nature, and since he has such a nature, its expression generates forms. As the forms are repetitive, they have predictive value.

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.

Learn about this "law" of the market.

You can do so by reading the online version of Elliott Wave Principle: Key to Market Behavior, which is available to you free when you join Club EWI. Membership is also free.

Club EWI is the world's largest Elliott wave educational community and members get free access to a wealth of resources on investing and trading.

Click on this link to get started: Elliott Wave Principle: Key to Market Behavior -- read it for free.

This article was syndicated by Elliott Wave International and was originally published under the headline Stock Market: "Relevant Waves Vs. Irrelevant News". 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.

Stocks, Oil: See How Elliott Waves Help You Avoid "Getting Married to the Trend"

By Elliott Wave International

Most investors make the mistake of linearly extrapolating a financial trend into the future, especially at junctures when that trend is near a turn.

In everyday terms, it's called "getting married to the trend."

Here's what Elliott Wave International President Robert Prechter said in his book, Prechter's Perspective:

Most published forecasts are at best descriptions of what has already happened. I never give any forecast a second thought unless it addresses the question of the point at which a change in trend may occur. ...

Read forecasts carefully. If they are unsophisticated, linear extrapolations of a recent trend, it's probably the best policy to toss them aside and go search for something potentially useful.

Employing the Elliott wave model helps a market participant to avoid the error of assuming that today's trend will carry into tomorrow. Why, even a 3^rd-grader can learn a tell-tale sign of when a trend is about to change. More on that in a bit.

First, let's look at a prime historical example of how trend extrapolation manifests.

A little background: the price of crude oil hit a low of $49.90 in January 2007 and then climbed dramatically in the following year and a half, reaching a high of $147.50 in July 2008.

Many energy market observers expected even higher prices.

Here are just a few of the headlines as crude oil was skyrocketing:

• Oil price 'may hit $200 a barrel' (May 7, 2008, BBC)
• An Oracle of Oil Predicts $200-a-Barrel Crude (May 21, 2008, The New York Times)
• WHAT IF OIL HITS $200? (June 28, 2008, Los Angeles Times)

In the same time frame, one chief executive of an energy firm had predicted $250 a barrel.

Yet, around the time these headlines were published, the Elliott wave model was suggesting a different price path for oil.

The June 8, 2008 Elliott Wave Theorist, a monthly publication which has provided analysis and forecasts for financial markets and cultural trends since 1979, said:

The Top of Wave 5 in Crude Oil Is Fast Approaching

Now, what is the significance of the completion of a fifth wave?

That means that a trend, whether up or down, is on the cusp of a turn. In this case, the trend had been up. So, the "top of Wave 5" meant that the next significant price move would be down. Well, as mentioned a moment ago, just a month later, crude oil's price hit that $147.50 top.

Here's what followed:

As Robert Prechter noted in his 2017 book, The Socionomic Theory of Finance:

Only someone extrapolating an Elliott wave could see that "one of the greatest commodity tops of all time" lay dead ahead. Those using supply-demand arguments and linear extrapolation ... were in the wrong place at the wrong time.

So, if you can count to five, you can anticipate trend turns, even when the majority are expecting the trend to continue.

Let's go a bit further back in history and see how "counting to five" helped our analysts call a top in the price of General Electric's stock.

In late October 2000, this chart was published in the Elliott Wave Financial Forecast, a monthly publication that covers major U.S. financial markets:

The completion of a quarter-century five-wave pattern portended a major reversal in GE's stock.

At the time, the Elliott Wave Financial Forecast made a straightforward forecast:

GE is going to go way down ... .

Here's what happened thereafter:

But, getting back to that 3^rd-grader who was mentioned earlier, you can see him discern a five-wave pattern in a market chart yourself and perhaps learn in the process.

Also, see how a college student picked right up on an even more detailed Elliott wave pattern -- in no time! Then, hear from one of Elliott Wave International's own wave experts who has more to say about the error of assuming a current trend will persist, well, merely because it's already in place.

It's all in a video titled "Anyone Can Learn the Wave Principle." Watch it for free -- compliments of Elliott Wave International.

Just follow this link to watch this fun little video now: "Anyone Can Learn the Wave Principle."

This article was syndicated by Elliott Wave International and was originally published under the headline Stocks, Oil: See How Elliott Waves Help You Avoid "Getting Married to the Trend". 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.

A Reason to be "Extra-Attentive" to Stock Market Sentiment Measures

By Elliott Wave International

Extreme investor sentiment, whether bullish or bearish, is often a sign that a financial market is on the cusp of a turn.

Here's the reason: When almost everyone is bullish (or bearish), there's almost no one left to push the market higher (or lower).

Having said that, an extreme market sentiment can become even more extreme before a trend change occurs. So, an investor should not rely solely on sentiment measures when making portfolio decisions. In other words, sentiment measures should be put into context with technical indicators, the Elliott wave model and other factors which an Elliott wave expert may consider important.

Indeed, Elliott Wave International's Chief Market Analyst recently discussed the elevated optimism since the March stock market lows and also noted an important caveat.

Here's a chart and commentary from EWI's June 24 U.S. Short Term Update (a thrice weekly publication which provides near-term forecasts for major U.S. financial markets):

This week's release of the Investors Intelligence Advisors' survey shows another measure where optimism is now higher than it was at the February 12-19 stock market peak in the blue-chip indexes. The percentage of bullish advisors is up to 57.3%, the highest total since January 21, as denoted by the red arrows on the chart. By the end of March, the Dow was 38% lower. Extreme sentiment can remain extreme, so it's not an automatic reason to be bearish the market. But the fact that advisor optimism is increasing while nearly every stock index is declining, save the NASDAQ, is a reason to be extra-attentive. ...

Yes, there are even more measures of extreme elevated sentiment that investors need to know about.

That issue of the June 24 U.S. Short Term Update also referred to record levels of investor optimism in Small Trader call buying, the total number of DARTs at the two largest U.S. discount brokerage firms, and the off-the-chart exuberance by institutional investors in the amount raised for blank-check IPOs.

Plus, here are two recent headlines:

• Wall Street rally wins more fans as economy hints at recovery (Reuters, June 17)
• What's Next? Probing The Data For Clues As Market Sentiment Remains Bullish (Forbes, June 17)

Well, the stock market's Elliott wave pattern, plus the extreme bullish sentiment, provide a high-confidence answer to the question of "What's next?"

Learn more about the Elliott wave model by reading the online version of the book, Elliott Wave Principle: Key to Market Behavior.

You can enjoy free access to this Wall Street classic when you join Club EWI, the world's largest Elliott wave educational community. Club membership is also free.

Follow this link to get started: Elliott Wave Principle: Key to Market Behavior -- free.