S&P 500: Revealing the "Real" Story About the Record High

 

Financial headlines do not always tell the full story

By Elliott Wave International

Sometimes you have to dig a little deeper than the headline to find out what really happened.

You know, like what's suggested by the television title "True Hollywood Story," or the BBC's "Real Story."

Sometimes getting the real scoop simply satisfies one's curiosity and is more entertainment than anything else. But, at other times, digging deeper into a subject can help one draw an important conclusion that may affect one's life -- or investments.

For example, consider this August 18 Washington Post headline:

U.S. stocks hit record high, ending shortest bear market in history

That headline was referring to the S&P 500 index. Of course, it suggests that a new rip-roaring bull market may be at hand. A new investor might say, "It's time to jump into the market with both feet."

Now, look at this August 22 CNBC headline:

The S&P 500′s return to a record doesn't tell the full story with 60% of stocks still with losses

Ah, this puts a whole new twist on the index returning to a record high. Of course, it suggests that the rally is not "deep," given it's being driven by less than the half of the index's components. That's important information for an investor.

Elliott Wave International's August 21 U.S. Short Term Update, a thrice weekly publication which provides near-term forecasts for major U.S. financial markets, dug even deeper into the behavior of the stock market:

The S&P made a new high today, but the push was attended by negative breadth and negative up/down volume. While the S&P rallied 0.34% today (11.65 points), 56% of the index's issues closed down for the day and just 44% closed up. The new high was attended by Big Board advancing volume of just 33.6% and declining volume of 66.4%. According to SentimenTrader.com, the volume measures were the worst ever for a 0.34% rally dating back to 1962.

Indeed, Elliott Wave International's market experts regularly review more than 100 technical indicators in their analytical work.

As you might imagine, the single most important factor to be considered when making a stock market forecast is the Elliott wave model.

This quote from the book, Elliott Wave Principle: Key to Market Behavior, by Frost & Prechter, provides insight:

In markets, progress ultimately takes the form of five waves of a specific structure. Three of these waves, which are labeled 1, 3 and 5, actually effect the directional movement. They are separated by two countertrend interruptions, which are labeled 2 and 4. The two interruptions are apparently a requisite for overall directional movement to occur.

[Ralph N.] Elliott noted three consistent aspects of the five-wave form. They are: Wave 2 never moves beyond the start of wave 1; wave 3 is never the shortest wave; wave 4 never enters the price territory of wave 1.

R.N. Elliott did not specifically say that there is only one overriding form, the "five-wave" pattern, but that is undeniably the case. At any time, the market may be identified as being somewhere in the basic five-wave pattern at the largest degree of trend. Because the five-wave pattern is the overriding form of market progress, all other patterns are subsumed by it.

If you are interested in learning more about the Elliott wave method of analyzing and forecasting financial markets, know that Elliott Wave International has made the online version of Elliott Wave Principle: Key to Market Behavior, available to you for free.

The only requirement is a Club EWI membership. Club EWI is the world's largest Elliott wave educational community and is free to join. There are no obligations as a Club EWI member.

Start reading the Wall Street classic for free by following this link: Elliott Wave Principle: Key to Market Behavior.

This article was syndicated by Elliott Wave International and was originally published under the headline S&P 500: Revealing the "Real" Story About the Record High. 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.

"Powerful Deflationary Winds" Include a "Bust in Commodity Prices"

 

By Elliott Wave International

Elliott Wave International's analysts have posited that the next big global monetary event will be deflation, not inflation.

The writer of an August 18 Telegraph article also sees "powerful deflationary winds."

Here's an excerpt:

Talk of resurgent global inflation is mostly noise. Powerful deflationary winds continue to blow through the world economy. ...

The great inflation hypothesis now in fashion rests on mechanical monetarism. It assumes that the fastest peacetime growth of the "broad" M3 money supply since the American Revolution lays a bed of inflammatory tinder that will catch fire once a match is lit: that is to say, when the velocity of money reverts to mean and collides with the enlarged stock of money.

Liquidity creation has been less extreme elsewhere (the Federal Reserve front-loaded $3 trillion in March and April) but there has still been an eye-watering jump in "narrow" M1 money across the OECD bloc -- ie, a surge in bank deposits due to hoarding of saved money through the lockdowns.

Monetarists say inflation did not take off when QE was first launched a decade ago because the western banking system was crippled. The stimulus offset the destruction of money by banks as they slashed lending in order to beef up capital buffers. This time banks are in better shape (in Europe, really?) and the transmission channel is intact. That at least is the argument.

The monetarist school has claimed victory already, quick to suggest that a V-shaped recovery in asset prices implies a V-shaped recovery in the real economy as well.

The Federal Reserve does not believe a word of it. Nor does the International Monetary Fund, nor the OECD, nor the global professoriate, nor the prophets of modern economic orthodoxy, loosely known as the New Neo-classical Synthesis. Their collective view is that central banks are low on usable ammo and will struggle to create any inflation, unless they escalate to the next stage of Weimar fiscal dominance.

It is now a pitched battle between two incompatible economic models. One side or the other is going to emerge looking bruised, and I suspect that it will be the monetarists. The velocity of money will indeed recover in the long-run but in the long-run -- pace Keynes -- we are all dead.

One thing that is not happening right now is a pre-inflationary surge in raw material prices, let alone an oil shock, though you might think otherwise after the wild moves in gold and silver. The Bloomberg all commodity index has recouped just half of its losses since the pandemic began and remains at near depression levels.

Speaking of raw material prices, Elliott Wave International's monthly publications have been keeping subscribers ahead of the trend.

Here's a chart and commentary from the March 2020 Elliott Wave Financial Forecast:

This chart shows the Thomson Reuters/CoreCommodity Index; the high on the chart is the end of a bear market rally in May 2018. In February 2018, EWFF called for a "substantial decline" in the CRB, and The Elliott Wave Theorist reiterated with a forecast for a resumption of the "Bust in commodity prices" on October 1, 2018. Two days later, the CRB index made the countertrend high shown by the arrow on the chart.

Get more important insights by reading the free report: What You Need to Know Now About Protecting Yourself from Deflation.

Why Stock Market Investors Need to Fasten Their Seatbelts

 

"Because financial markets are a fractal, present conditions never maintain"

By Elliott Wave International

Elliott Wave International's analysts have long noted that periods of low stock market volatility are almost always followed by periods of high volatility.

Granted, periods of low volatility can stretch for a while, yet a change occurs sooner or later -- and that shift is often dramatic.

Here's a case in point from the Elliott Wave Theorist which published on Oct. 23, 2017 (The Elliott Wave Theorist is a monthly publication which offers analysis of financial markets and social trends):

Persistent new highs in stock prices week after week and recently day after day have led to a substantial reduction in the volatility of stock prices, to the point that the CBOE Volatility Index has just reached an all-time low.

The VIX futures contract is widely characterized as a bet on the future, that is, as a gauge of expected volatility. But futures contracts always reflect the present, never the future. And because financial markets are a fractal, present conditions never maintain.

As you may know, a fractal is an object that is similarly shaped at different scales.

At the time the chart published, Large Speculators were short a record number of VIX futures contracts.

Yet, it wasn't long before the inevitable changed unfolded.

Stock market volatility took a big jump in late January and early February of 2018, with the DJIA surrendering 10% in less than two weeks.

And 2018 also brought other periods of eyebrow raising volatility.

On Dec. 7, 2018, Bloomberg reported that the S&P 500 had 1% daily trading swings 56 times up to that point in 2018.

What does that have to do with the present?

Well, the August 14 U.S. Short Term Update, an Elliott Wave International thrice-weekly publication which provides near-term forecasts for major U.S. financial markets, notes:

With the exception of five days in early June, the VIX has been declining since March 18, when prices spiked to a high at 85.47. This five-month decline culminated with a streak of 7 consecutive lower closes through August 10. ... Currently, Large Speculators are net short nearly a third of all open interest in VIX futures.

Of course, it's possible that the VIX slips to even lower lows before a jump in volatility unfolds.

One invaluable analytical tool to use along side the VIX is the Elliott wave model, which is fully described in the Wall Street classic book, Elliott Wave Principle: Key to Market Behavior, by Frost & Prechter. Here's a quote:

No matter what your convictions, it pays never to take your eyes off what is happening in the wave structure in real time. Ultimately, the market is the message, and a change in behavior can dictate a change in outlook. All one really needs to know at the time is whether to be long, short or out, a decision that can sometimes be made with a swift glance at a chart and other times only after painstaking work.

Get more insights into the Elliott wave model by reading the entirety of the online version of Elliott Wave Principle: Key to Market Behavior.

Simply become a member of Club EWI, the world's largest Elliott wave educational community, and access to the book is 100% free. Club membership is also free.

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 Why Stock Market Investors Need to Fasten Their Seatbelts. 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: See What This Fibonacci Ratio Says About Trend

 

A Fibonacci .618 retracement is a common reversal point in the markets

By Elliott Wave International

Fibonacci numbers follow a sequence that begins with 0 and 1, and each subsequent number is the sum of the previous two (0, 1, 1, 2, 3, 5, 8, 13, 21, 34, and so on).

After the first several numbers in the sequence, the ratio of any number to the next higher is approximately .618 to 1; its ratio to the next lower number is approximately 1.618 to 1.

Fibonacci ratios appear throughout nature, from the shape of galaxies and seashells to molecules and even the human body.

The Wall Street classic book, Elliott Wave Principle: Key to Market Behavior, by Frost & Prechter, explains why these ratios should be of keen interest to investors:

The Fibonacci sequence governs the numbers of waves that form in the movement of aggregate stock prices. ...

The fact that waves produce the Fibonacci sequence of numbers reveals that man's collectively expressed emotions are keyed to this mathematical law of nature.

Here's what you need to know: Price turns often occur when Fibonacci ratios between market moves -- or waves, as we call them -- have been reached.

Besides the stock market, Fibonacci ratios also show up in the price charts of other financial markets, like gold.

Here's a 15-minute chart and commentary from the August 10 U.S. Short Term Update, a thrice weekly Elliott Wave International publication which provides near-term analysis and forecasts for major U.S. markets:

Gold's high at $2072.12 led to [an Elliott] wave decline to $2015.34 last Friday, as shown on the chart. Since Friday's low, prices traced out an [Elliott] wave rally where [one] wave took the form of a triangle. At today's $2050.36 high, gold retraced a Fibonacci .618 of the decline from $2072.12.

Gold, as you know, fell almost 6% on August 11, the very next day after the U.S. Short Term Update showed subscribers this analysis.

But the August 10 U.S. Short Term Update didn't stop there. It went on to mention specific price targets for gold.

That's the beauty of the Elliott wave model -- it helps investors to anticipate what's next.

Let's once again quote from Elliott Wave Principle: Key to Market Behavior:

Without Elliott, there appear to be an infinite number of possibilities for market action. What the Wave Principle provides is a means of first limiting the possibilities and then ordering the relative probabilities of possible future market paths. Elliott's highly specific rules reduce the number of valid alternatives to a minimum.

Are you ready to "dig in" and absorb all that the Elliott Wave Principle has to offer?

If so, be aware that you can now access the online version of Elliott Wave Principle: Key to Market Behavior -- free (no credit card information required -- 100% free).

The only step required is to become a Club EWI member, and this is also free with no obligations whatsoever.

Besides free access to Elliott Wave Principle: Key to Market Behavior, members are also granted free reign to review other Elliott wave educational resources on trading, investing and financial markets.

You'll be in good company when you join. Club EWI has 350,000 online members -- and its ranks continue to expand.

Follow this link for free online access to Elliott Wave Principle: Key to Market Behavior.

This article was syndicated by Elliott Wave International and was originally published under the headline Gold: See What This Fibonacci Ratio Says About 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.

Aussie Dollar Soars to Multi-Month High: You Can't Have Your Fed Stimulus Boost AND Eat It Too

 

By Elliott Wave International

This chart of the Australian Dollar/US Dollar exchange shows that since late March, the dollar-down-under has trended:

UP... to its highest level in 15 -- no, make that 18 months.

What explains the Aussie dollar's strength?

News accounts cite the Federal Reserve's $2.2 trillion (and counting) megawatt coronavirus stimulus policies, which supposedly pressured the U.S. dollar.

"Australian Dollar Looks to Federal Reserve and Gold Price for Lift to New Highs as Rally Ebbs" (PoundSterlingLive.com, July 29)

"AUD/USD bulls reaching for the blue skies in the 0.72 area post Fed, best since April 2019" (FXStreet.com, July 29)

One news source even likens the US central bank to the Star Wars "Death Star," armed with a stimulus laser strong enough to take out entire economies. It writes: "The Fed is sailing global forex markets in a money printing Death Star that is aiming a deflationary cannon at any economy in its path that does not match it."

We can recall a very different story back in March and April. Then, the Aussie dollar was near 17-year lows even as the same death star Fed policies threatened a death blow to the currency's upside.

One news source said the Fed's limitless lending tactics were quote "eviscerating" the Aussie note, while another said its emergency measures would fuel market turmoil and volatility:

"The overall backdrop is profoundly bearish for the Aussie dollar... Any rallies will be fragile. Central bank measures are very much welcome, but the uncertainty of the impact means the market will remain volatile." (afr.com, March 16)

In turn, the Aussie dollar's powerful rally can only be understood by disregarding the Fed as a "cause," and looking instead to the currency's price chart.

Here on April 13, Elliott Wave International's Currency Pro Service showed subscribers that a rising trend was emerging. We presented a version of this chart which counted five waves down in the Aussie/US dollar complete at this March 18 low.

EWI's analysis said, "Given the very impulsive advance, we [support] the bullish scenario" -- and our forecast called for a powerful Elliott Wave pattern known as "a third-of-a-third wave" higher.

Price did indeed rally strongly into June 10, followed by a brief pullback into June 15th. Their Pro Services comment on June 15th said the action "suggests a bottom is likely in place," and that our "bullish outlook calls for a turn higher from current levels."

From there, the Aussie dollar continued its powerful move higher thru August 6th.

The Aussie/US dollar pair is among the world's leading forex pairs. Others include the EURUSD, USDJPY, GBPUSD, USDCAD, and more! Right now, EWI's premier Currency Pro Service identifies high-confidence trade set-ups in these markets -- for intraday, daily, and weekly time frames.

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The timing couldn't be better. Gold and silver have been making headlines -- and aren't done according to EWI's analysts. They also say EURUSD and several other FX pairs are poised for big moves. You get a front-row seat to these new opportunities free.

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This article was syndicated by Elliott Wave International and was originally published under the headline Aussie Dollar Soars to Multi-Month High: You Can't Have Your Fed Stimulus Boost AND Eat It Too. 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.

NASDAQ vs. DJIA: Does the Recent Divergence Matter?

 

By Elliott Wave International

"The NASDAQ nearly doubled in the last 100 days of its rally."

This quote sounds like it's from 2020, doesn't it?

After all, since its March bottom near 6600, the NASDAQ has rallied to a new record high. Low to high, it has indeed "nearly doubled."

And yet, the quote above is not new. It's from the year 2000.

It appeared in Financial Forecast, a monthly publication by our friends at Elliott Wave International covering stocks, bonds, the dollar, gold, the economy and more.

Yes, the divergence between the NASDAQ and DJIA -- one makes a record high, the other one doesn't -- is something EWI’s analysts have seen before.

And today, the same divergence tells you a lot about the next move in stocks.

This excerpt from EWI’s August 2020 Financial Forecast explains:

Special Section
ANOTHER ICARUS MOMENT FOR THE NASDAQ

In December 1999, just weeks before the Dow Jones Industrial Average made its Primary wave 3 peak on January 14, 2000, the NASDAQ Composite was surging higher to ever more ecstatic reviews. "Ignore any forecast of the Dow," cried the pundits. The Elliott Wave Financial Forecast saw it differently: "When the NASDAQ (and predecessor the OTC Index) pushes into record territory against a lagging Dow, the overall market is late in a long-term uptrend. It is only after years of ascent that investors can work up the courage to jump into these relatively young names despite a weakening trend." In the January 2000 issue, when the Dow was days from its top, EWFF called the "languishing Dow and the ebullient NASDAQ a classic sign of long-term vulnerability for the market." The NASDAQ nearly doubled in the last 100 days of its rally. With the index just days from its peak, the March 2000 issue of EWFF issued the following forecast:

The NASDAQ's strength is derived from rotation among a thinning list of high-tech stocks. "The mentality is, 'Let's trim the generals [the Dow stocks] and put some of that money to work among the soldiers [the Nasdaq issues].'" Investors are so bullish that they will defy their own social nature to back a leaderless army. Such transgressions generally happen only late in long-term uptrends. The resulting carnage resembles what happens in a real war when the generals abandon the fight.

Similarly, after the Dow Industrials topped in December 1968, the OTC index rallied to a new high in November 1969, unconfirmed by the Dow. Overall, neither stock index made any material gains for another 13 years.

The chart above captures the latest divergence between the two indexes, which dates back to February 12 when the DJIA rallied to 29,551.42, its [so far] all-time closing high. The NASDAQ's closing high then occurred at 9817.10 on February 19. After declining in conjunction with the Dow to March 23, the ensuing rally carried the NASDAQ to new highs.

As in 2000, a "thinning list of high-tech stocks" accounts for much of the stock market's strength. The figure below shows that in June, just five technology stocks, Facebook, Alphabet (Google), Microsoft, Apple and Amazon, accounted for 5.7% of the S&P 500's year-over-year increase in total market capitalization, a new record. The prior extreme came at the major top in March 2000.

In July, the advance narrowed further to three main stocks, as approximately 23% of the S&P's gain came from Amazon, Apple and Alphabet (Google).

The next chart shows another area in which the NASDAQ recently surpassed a post-peak extreme from 2000. In early July, NASDAQ volume surged to 1.6 times S&P volume, the highest on record.

The prior record ratio of 1.35 occurred on September 5-6, 2000, when the NASDAQ and S&P 500 completed second-wave rallies in their respective bear markets.

There is an important difference between the peaks in 2000 and 2020. In 2000, financial stocks performed well, holding up for the balance of the year as the major stock averages declined.

The next chart reveals that's not the case now. On a short- and long-term basis, the MSCI World Financials Index is far weaker than the main stock indexes.

In this respect, current market behavior is more like 1968-1969. That is when financial entities struggled in the midst of an ongoing speculative orgy. Brokerage firms were privately held at that time, but in his book The Go-Go Years

In September 1969, two months before the peak in the OTC Index, NYSE member firm Gregory and Sons went under.

In December, only one month after the OTC top, Brooks wrote, "Depression had come to Wall Street. A cheerless pall of doom hung over the financial district through the 1969 holiday season."

A slew of failures in marginal firms followed. Even "conservative, well-established giants were in bad trouble. Bache and Company reported that for fiscal 1969, it had recorded the largest annual operating loss in the annals of American brokerage. Shock waves followed."

Back in 2014, market expert Ned Davis said, "If there are systemic risks, financials generally will ferret them out."

That observation remains as pertinent as ever.

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This article was syndicated by Elliott Wave International and was originally published under the headline NASDAQ vs. DJIA: Does the Recent Divergence Matter?. 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 90-Year-Old Investment Insight That's Relevant in 2020

 

R.N. Elliott’s work explains why stocks rallied despite Covid and other bad news

By Elliott Wave International

Many of you know that Ralph Nelson Elliott discovered the method of forecasting the markets that today we call Elliott wave analysis -- or, more formally, the Elliott Wave Principle.

R.N. Elliott lived from 1871 to 1948, and July 28 was his birthday.

A way to pay tribute is to mention one of the key observations he made during his years of studying the stock market (R.N. Elliott's Masterworks):

As the Wave Principle forecasts the different phases or segments of a cycle, the experienced student will find that current news or happenings, or even decrees or acts of government, seem to have but little effect, if any, upon the course of the cycle. It is true that sometimes unexpected news or sudden events, particularly those of a highly emotional nature, may extend or curtail the length of travel between corrections, but the number of waves ... remains constant [emphasis added].

What this means, simply, is what EWI subscribers have known for decades: News and events don't affect or create broad market trends. Of course, this seems to defy logic because most people believe that news and events are the very things that drive the stock market.

Yet, there was also a time when most people believed that only birds could fly. But what governs airplane flight, the buoyancy of metal ships, the light produced by an incandescent light bulb, radio transmission over the air -- and, yes, the Wave Principle of price formation in the financial markets -- is natural law.

Natural law is inherent in price patterns of stocks and other markets. Those are the patterns of the market participants' collective psychology, the true driver of price trends. That's why outside events do not materially influence the pattern's behavior.

In fact, often the stock market behaves in a completely opposite manner from what the majority of market observers would expect from the news.

Here's a chart and commentary from our July Elliott Wave Theorist, a monthly publication which has provided analysis of financial markets and social trends since 1979:

[This figure] is updated from the June issue and shows that on Sunday, July 12, Florida reported the largest tally, from any state, of new Covid cases since the pandemic began. Did the stock market care? No, it gapped up the following morning. This morning (Friday, July 17), Bloomberg reported that profit at the consumer banking unit of Bank of America has "plunged 98%," and overall profit at the bank is down by more than half. The U.S. banking system is in serious trouble. Does the stock market care? No, it gapped up on the day.

In the nearly 90 years since R.N. Elliott observed that news does not alter the market's wave pattern, his insight has been proven time and again.

So, it's wise to keep your market eye on what really matters: the Wave Principle of human psychology.

With that in mind, Elliott Wave International has made the online version of the book, Elliott Wave Principle: Key to Market Behavior, available for free.

Here's an excerpt from this Wall Street classic:

In the 1930s, Ralph Nelson Elliott discovered that stock market prices trend and reverse in recognizable patterns. The patterns he discerned are repetitive in form but not necessarily in time or amplitude. Elliott isolated five such patterns, or "waves," that recur in market price data. He named, defined and illustrated these patterns and their variations. He then described how they link together to form larger versions of themselves, how they in turn link to form the same patterns of the next larger size, and so on, producing a structured progression.

Learn about these patterns by reading Elliott Wave Principle: Key to Market Behavior -- 100% free.

All that's required is a free Club EWI signup. Club EWI is the largest Elliott wave educational community in the world and membership is also free.

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

This article was syndicated by Elliott Wave International and was originally published under the headline A 90-Year-Old Investment Insight That's Relevant in 2020. 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.