Investor Psychology: Here are 2 Rare Traits Now on Display

Stock market newcomers revel in their ignorance

By Elliott Wave International

In the past year, the stock market has been flooded by inexperienced investors.

Here's a May 12, 2020 CNBC headline:

Young investors pile into stocks, seeing 'generational-buying moment' instead of risk

The message of that headline matches up with the sentiment among many investors that the stock market is at the start of a boom -- not near an end.

Yes, financial history shows that the same psychology has been on display before, i.e., the heralding of "The New Economy" in 2000 -- just as stocks were topping. And, if you want to go all the way back to the 1929 top, the proclamation of "A New Era."

There are other psychological characteristics on display here in 2021 that are rare.

One of them is a dismissal of the market admonitions from experienced market veterans -- those who've lived through both bull and bear markets.

As the March Elliott Wave Financial Forecast, a monthly publication which provides analysis of major U.S. financial markets, reiterated:

A backlash has emerged against the experienced professional, to the point that someone with "a knowledge of history and value is eventually judged as an impediment to success."

Our April Elliott Wave Financial Forecast described another rare -- if not "unprecedented stage" -- of investor psychology. Here's a chart and commentary:

Newcomers now revel in their ignorance. The chart from The Wall Street Journal shows the "Rise of the Know-Nothings." It's derived from the postings on WallStreetBets' Reddit forum of GameStop fans. In the wake of GameStop's peak on January 28, the percentage of those professing stock market ignorance spiked to about 3% of those posting on WallStreetBets. The use of terms such as "stupid," "idiot" and "no idea what I'm doing" identified the know-nothings. ... The percentage of know-nothing references [spiked] to a high of almost 11% on March 14. So, the foundational basis for the New Era is idiocy.

The reason for pointing out these traits is that they seem to reflect a market psychology that signals an end -- not the beginning -- of a financial "boom."

The best way to get a precise handle on the stock market is to review the Elliott wave pattern of the main indexes.

If you're unfamiliar with the Wave Principle or need to brush up, here's a quote from the Frost & Prechter's Elliott Wave Principle: Key to Market Behavior:

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.

[R.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'd like to read the entire online version of this Wall Street classic book, you may do so -- free.

All that's required for free access is a Club EWI membership. Club EWI is the world's largest Elliott wave educational community and is free to join. Members enjoy free access to a wealth of EWI resources on financial markets, investing and trading.

Simply follow this link to get started right away: Elliott Wave Principle: Key to Market Behavior -- free and instant access.

This article was syndicated by Elliott Wave International and was originally published under the headline Investor Psychology: Here are 2 Rare Traits Now on Display. 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.

"Fastest Jump Since 2007": How Leveraged Investors are Courting "Doom"

"Our view is that the use of margin to buy stocks is far higher than the NYSE figures indicate"

By Elliott Wave International

The stock market uptrend has extended for more than 11 years.

Even so, instead of displaying caution, investors have been borrowing to buy stocks like there's no such thing as a bear market.

For example, consider this chart and commentary from the March Elliott Wave Financial Forecast, a monthly publication which provides analysis of major U.S. financial markets:

Alan M. Newman, editor of Crosscurrents (www.cross-currents.net), is a market veteran who has seen many bull and bear markets. He recently published this "startling" chart of what he calls Net Investment Liquidity, in which he subtracts total U.S. mutual fund cash from total New York Stock Exchange margin debt. [Newman said]: "We've seen a lot in 56 years of observation and this appears to be the riskiest environment in my lifetime."

The April Elliott Wave Financial Forecast provided more coverage of margin debt by saying:

Margin debt as a percentage of U.S. disposable personal income hit 4.6% in February, well above the extremes of approximately 4% in 2000 and 2007. With "lopsided commitments" to leveraged long funds and all kinds of other arcane financial instruments, our view is that the use of margin to buy stocks is far higher than the NYSE figures indicate.

An April 9 Business Insider article offered this angle:

Margin debt saw an annual surge of 49% in February, which was the fastest jump since 2007. ...

Leverage is a double-edged sword for investors, as many take on the debt to buy more stocks. That is a winning strategy in a bull market, but a market correction can spell doom for investors who have too much leverage and need to sell equities or deposit more cash to meet margin calls, which can further exacerbate a downturn in stocks.

Financial history shows that bull markets usually reverse big-time just when confidence is at its zenith -- the precise moment to exact maximum damage on investors' stock portfolios.

Indeed, the Elliott wave model suggests that the U.S. stock market is at an important juncture.

Frost & Prechter's book, Elliott Wave Principle: Key to Market Behavior, discusses the value of the Elliott wave model:

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 have free access to the online version of Elliott Wave Principle: Key to Market Behavior by becoming a member of Club EWI, the world's largest Elliott wave educational community. Club EWI is free to join and allows you free access to a wealth of Elliott wave resources on investing and trading.

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

This article was syndicated by Elliott Wave International and was originally published under the headline "Fastest Jump Since 2007": How Leveraged Investors are Courting "Doom". 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 "Lopsided" Stock Market Ratio Is Sending a Clear Signal

Investors always find ways to "rationalize" bearish or bullish stances

By Elliott Wave International

For a stock market investor who understands that markets are not random or chaotic but instead patterned, the most important information to know is the price pattern of the market in question.

For an Elliott wave investor, the task is even more defined. As Frost & Prechter's Wall Street classic book, Elliott Wave Principle, says:

The market's progression unfolds in waves. Waves are patterns of directional movement.

So, familiarity with the Elliott wave model for forecasting financial markets is a must.

Another key factor in analyzing the stock market is sentiment. The reason why is because when bullish or bearish sentiment reaches an extreme, financial history shows that a "tipping point" -- in the opposite direction -- is usually just around the corner.

With that in mind, let's review a chart and commentary from the April 7 U.S. Short Term Update, an Elliott Wave International thrice weekly publication which provides near-term forecasts for major U.S. financial markets:

Investment advisors are lopsidedly bullish ... as shown on this chart of the Investors Intelligence bull/bear ratio, which pushed to 3.64 last week. At the end of the previous [downward Elliott wave] the ratio was 0.72:1, with more bears than bulls. Investors herd. They become more bearish when the trend is declining and more bullish when the trend is rising. All "reasons" that are offered as to why they are becoming more bearish or bullish are just rationalizations. ...

As an example, consider this March 31 Business Insider headline:

Stocks are expensive and retail inflows are soaring, but Goldman Sachs says history shows the market is not in a bubble

Hmm -- if stocks are expensive and the public is investing like there's no tomorrow, isn't that the definition of a frothy market -- i.e., a bullish extreme in the sentiment?

An April 6 Marketwatch article cited $5.3 trillion in COVID economic stimulus, an economic organization's doubling of its projections for U.S. GDP growth and a strong March jobs report. It then followed by saying:

What this means is that the U.S. market is poised to outperform other major stock markets in the 2020s just as it did in the 2010s ... .

The U.S. market might outperform major European or other stock markets around the globe for the remainder of the decade. Yet, the point is that "reasons" can always be found to support a particular stock market sentiment.

Yes, knowledge of sentiment extremes often serves as a red flag that a change of trend may be at hand.

Yet, as said, it's also important to focus on the market's wave pattern.

As Frost & Prechter's book, Elliott Wave Principle: Key to Market Behavior, says:

The Wave Principle often indicates in advance the relative magnitude of the next period of market progress or regress. Living in harmony with those trends can make the difference between success and failure in financial affairs.

If you'd like to read the entire online version of the book, you can do so for free.

That's right -- all that's required for free access to this Wall Street classic is a Club EWI membership. Club EWI is the world's largest Elliott wave educational community with about 350,000 members and is free to join. When you join Club EWI, you are instantly granted free access to a treasure trove of Elliott wave resources on investing and trading.

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

This article was syndicated by Elliott Wave International and was originally published under the headline This "Lopsided" Stock Market Ratio Is Sending a Clear Signal. 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.

8 Indicators in 1: Here's the Message of the Panic/Euphoria Model

Prior model extremes occurred in March 2000 and October 2007

By Elliott Wave International

Elliott Wave International has been providing market analysis for more than four decades -- which includes many bull/bear market cycles.

That said, the public's current market mindset -- especially among inexperienced investors -- is a reminder of the extremes surrounding the 2000 market top, and a few others.

For example, a February 27 MarketWatch headline said:

A new wave of fearless retail investors is ready to pour $170 billion into stocks ...

Also, according to an early February Deutsche Bank survey of online brokerage users, 61% are under 34 years of age and 45% are in their first year of investing.

As Barron's reports (Feb. 25):

Younger, Savvier Investors Are Making Up a New Movement

So, all in all, there's no shortage of financial optimism.

Indeed, the March Elliott Wave Financial Forecast, a monthly publication which provides analysis of major U.S. financial markets, showed this chart and said:

This chart shows SentimenTrader.com's version of the Panic/Euphoria Model, which is an amalgamation of eight indicators that range from New York Stock Exchange short interest to individual and advisory sentiment surveys and retail gas prices. Prior model extremes occurred at 1.413 on March 24, 2000, the day of the top in the S&P 500 that led to a 51% decline, and 1.337 on October 12, 2007, one day after the S&P 500 peaked and started a 58% decline. The other two extremes were 1.427 on January 7, 2011 and 1.444 on April 8, 2011, neither of which mattered immediately to stock prices, but the S&P soon declined 22% from May 2, 2011 to October 4, 2011. On February 12, 2021, one trading day before the high in the NASDAQ indexes, euphoria clearly got the best of the investment public as the model shot to a new record at 1.613.

It's important to know that this extreme in optimism ties in perfectly with what the Elliott wave model is conveying right now.

The beauty of the Elliott wave model is that it can help you to anticipate trend changes.

Here's a quote from Frost & Prechter's Elliott Wave Principle: Key to Market Behavior:

It is a thrilling experience to pinpoint a turn, and the Wave Principle is the only approach that can occasionally provide the opportunity to do so.

The ability to identify such junctures is remarkable enough, but the Wave Principle is the only method of analysis that also provides guidelines for forecasting.

Learn these Elliott wave guidelines for forecasting financial markets by reading the online version of Elliott Wave Principle: Key to Market -- 100% free!

All that's required for free access to this Wall Street classic is a Club EWI membership -- which is also free. Club EWI is the world's largest Elliott wave educational community (approximately 350,000 worldwide members) and members get free access to a treasure trove of Elliott wave resources on financial markets, investing and trading.

Get started now by following this link: Elliott Wave Principle: Key to Market Behavior -- free access.

This article was syndicated by Elliott Wave International and was originally published under the headline 8 Indicators in 1: Here's the Message of the Panic/Euphoria Model. 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.

See This "Anatomy of a Bursting Bubble"

"Parabolic advances are inherently unsustainable"

By Elliott Wave International

Those who are familiar with the Elliott wave model for analyzing and forecasting financial markets know that a main trend takes the form of five waves.

Thus, when the fifth wave is complete, a trend in the opposite direction is set to begin.

Another insight into the Wave Principle that's relevant to the present discussion is that corrections often end at the terminus of the previous fourth wave of one lesser degree of trend.

If that sounds like a mouthful, hold on, you're about to see a market example that'll make it plain as day.

Almost two years ago, the September 2019 Global Market Perspective, an Elliott Wave International monthly publication which provides analysis of 50+ worldwide markets, made this forecast:

The London Stock Exchange Group has been riding along an upward parabolic curve that has generated a 20-fold increase in the stock price since the late 2000s. Parabolic advances are inherently unsustainable, and this one is even more precarious given that we can count five waves up since the LSE's public debut. Once the rally breaks, an initial decline should pull prices back to a previous fourth wave ... implying a near 50% sell-off from today's levels.

Fast forward to this update from the just-published April 2021 Global Market Perspective (keep in mind that wave labels are only available to subscribers):

These two updated graphs show exactly how this forecast played out. The cited advance was the end of [a fifth-wave rally], which topped at 7922 on September 11, 2019. Prices [then] plummeted 39% in [a corrective wave] and bottomed above the previous-fourth wave price target.

The near-term chart on the right illustrates [another upward Elliott wave pattern], which began at the March 2020 low. After rising within two converging trendlines, LSE Group peaked on February 16, 2021. In March, the stock price tumbled 39% again.

This is just one example of many. Elliott wave analysis works for any widely traded financial market around the world.

As the Wall Street classic book, Elliott Wave Principle: Key to Market Behavior, by Frost & Prechter, says:

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.

If you would like to learn about "Elliott's highly specific rules," you can read the online version of Elliott Wave Principle: Key to Market Behavior, 100% free.

All that's required for free access to the book is a Club EWI membership. Club EWI is the world's largest Elliott wave educational community and is free to join. Members enjoy instant access to a wealth of Elliott wave resources on financial markets, investing and trading.

Get started by following this link: Elliott Wave Principle: Key to Market Behavior -- free access.

This article was syndicated by Elliott Wave International and was originally published under the headline See This "Anatomy of a Bursting Bubble". 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.

The Easiest Money in History

If raising money doesn't get any easier than this, what's next?

By Murray Gunn

The latest data from Refinitiv shows that companies have raised a record $140 billion in the U.S. dollar junk bond market during the first quarter of this year. That beats the previous record set during the second quarter last year when companies scrambled to issue debt in a bid to raise cash during the pandemic. The three biggest issuance quarters in history have been set in the past year. With investors falling over themselves to lend money to any venture offering a U.S. dollar yield above 4%, companies are now not only finding that they can raise money easily in order to roll over existing debt, but some are using the proceeds to pay dividends to owners. It's beyond absurd.

When a mania is in full force, though, the vast majority of participants are blind to the absurdity. Investors, for instance, think that they must lend because 4% or higher is such a juicy yield when compared with anything else. And the central banks will not let companies fail, so it's a free lunch.

Right.

This era of central bank-induced gushing liquidity, combined with a manic social mood, has created statistics that, when looked back on in the cold light of day, will be viewed as clearly insane. At this juncture, it is seen as entirely normal, indeed clever, to give your money to someone who will not tell you what they are going to do with it. The SPAC (Special Purpose Acquisition Company) mania is a prime candidate for the financial bubble history books.

And then, when we think we've seen it all, along come NFTs. Non-fungible tokens are the new hot, must-have accessory in town. According to Wikipedia, "a non-fungible token is a unit of data on a digital ledger called a blockchain, where each NFT can represent a unique digital item, and thus they are not interchangeable. NFTs can represent digital files such as art, audio, videos, items in video games and other forms of creative work." Ah, life in the cloud.

But it doesn't matter if anyone understands them. The crowd is besotted by them and that's all there is to it. This week, a New York Times columnist sold his column as a non-fungible token for $560,000, writing "Why can't a journalist join the NFT party, too?"

The free lunch party is in full swing. We say enjoy it while it lasts because the hangover is going to be biblical. If you need some religion, check out the free report, Money Making Rules for Investors. Get instant access with a free Club EWI membership.

This article was syndicated by Elliott Wave International and was originally published under the headline The Easiest Money in History. 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 These Stock Market Indicators Should Grab Your Full Attention

The McClellan Summation Index has been "in a clearly defined downtrend since late December"

By Elliott Wave International

Many Main Street investors only pay attention to the daily trading closes of the main stock indexes.

But those who fall in that camp are missing out on a lot of valuable insights regarding the strength or weakness of a trend. In other words, when it comes to the stock market, it pays to "look under the hood."

For example, on Friday (March 26), all three major indexes rallied with the S&P 500 climbing 1.7% to hit a record closing high. Those who glance at the stock market headlines may have concluded "all systems go."

Yet, on Monday (March 29), our U.S. Short Term Update took a look "under the hood" and saw a rally that was showing signs of fatigue. Here's a chart and commentary:

Today's Dow rally to a new high was attended by a negative NYSE advance/decline ratio of 0.48:1 and more down volume than up volume. ... The weak breadth measures are seen on the chart of the McClellan Oscillator in the middle graph and the McClellan Summation Index in the lower graph. The McClellan Oscillator is an indicator based on the exponential moving averages of the daily advance/decline data and the Summation Index is in essence a running sum of the daily values of the Oscillator. The Oscillator has been traversing the zero line, while the Summation index is in a clearly defined downtrend since late December.

Interestingly, the very next trading day, all three indexes closed lower.

The message of the McClellan Oscillator and Summation Index align with the message of the Elliott wave model.

If you're unfamiliar with the Wave Principle, or need to brush up, here's a quote from the Wall Street classic, Elliott Wave Principle: Key to Market Behavior, by Frost & Prechter:

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. He called this phenomenon The Wave Principle.

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 read the entire online version of the book for free.

That's right -- all that's required is a Club EWI membership. Club EWI is free to join and allows you access to a wealth of Elliott wave educational resources.

Get started by following this link: Elliott Wave Principle: Key to Market Behavior -- free and unlimited access.

This article was syndicated by Elliott Wave International and was originally published under the headline Why These Stock Market Indicators Should Grab Your Full Attention. 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.

The Real Story Behind This "Road to Riches" Scheme

Penny Stocks Hit $2 Trillion

By Steven Hochberg

Penny stocks are an investment vehicle that really has garnered the attention and speculation of investors in early 2021. They're plunging headlong into off-exchange shares.

I remember back when I started in the early 1980s at Merrill Lynch, there was a guy that walked in the office and he had pieces of paper that were pink, and I didn't know what they were.

I was 23 years old, just starting out. I went over to him and said, "What are you looking at?" And he turned to me and he said, "Son, this is your road to riches right here." And then he was looking at the OTC bulletin board pink sheets of these off-penny stocks.

He was partly right, because when they fired him, about three months later, they wound up giving me his books. So it was my road to riches originally, but I didn't quite understand what he was talking about.

Bulletin board or penny stocks are the most speculative shares you can get. They're often the most liquid shares. They're a hotbed of pump and dump stock manipulation schemes. And they're an area best avoided by all investors.

Unbelievably, penny stock trading volume through the month of February hit $2 trillion. That's trillion with a T.

What you're looking at here is the daily penny stock trading volume, which is well over a hundred billion by the middle of February. And by the end of February, it hit a total for the month of two trillion. This is an area of speculation that we see that investors are just throwing caution to the wind and going full steam ahead into the market.

---

This article is excerpted from a video presentation done by Steven Hochberg, Chief Market Analyst at Elliott Wave International. The full 25-minute video is of "aha" moments and charts that you won't see anywhere else. Sign up for a FREE Club EWI account now to watch the full video.