What Junk Bonds Convey About Investors' Mindset

"Governments feel rich and are spending like drunken sailors"

By Elliott Wave International

Extremely elevated financial optimism is being expressed in multiple ways.

In some ways, the behavior of investors is unprecedented -- which is saying a lot given the financial extremes of past bull markets.

Consider the junk bond market here in 2021. The September Elliott Wave Theorist showed this chart and said:

As we continue to demonstrate, stocks, property, cryptocurrencies and digital art are not the only overvalued markets. Bonds are no less crazily priced. The chart reveals that fully 85% of all junk bonds yield less than the annualized percentage change in the Consumer Price Index. How is that for blind optimism?

Yes, stocks remain near record-high territory after a more than 12-year uptrend, bitcoin is near record-high territory and the rate of price increases in the housing market has been unprecedented (again, saying a lot given the extremes of the prior housing boom).

Even so, an Oct. 18 Fortune article says:

In the next 15 months -- through the end of 2022 -- Goldman Sachs is forecasting U.S. home prices will soar another 16%.

And, who would have ever imagined a few short years ago that digital images would sell for millions?

Yet, here's the latest headline (Oct. 19):

How a 12-year-old coder says he made $600,000 by selling Weird Whales NFTs

Of course, "NFT" stands for non-fungible token -- a unique digital asset. The current craze in that space is around digital artwork.

The October Elliott Wave Theorist mentions several more expressions of a positive social mood. Here are just a portion of them:

Governments feel rich and are spending like drunken sailors; central bankers are confident and unworried, and they have been characterized as heroes; the world economy is producing more tax revenue than ever, despite government efforts to kill productivity; and there are no wars anywhere on the entire planet.

The October Theorist concludes with a hint of what to expect over the next three years.

The Elliott Wave Theorist is part of the Financial Forecast Service -- Elliott Wave International’s flagship investor package -- which offers Elliott wave analysis of major U.S. financial markets.

Now through November 3, you can see that analysis FREE in EWI’s most popular event of the year, “U.S. Markets FreePass

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1. Financial Forecast gives you the ins and outs of 8 different major markets, with a U.S. focus, on a several-months’ timeframe.
2. The Theorist brings you big-picture insights about the markets and mass psychology. Authored by the inimitable Robert Prechter.
3. Short Term Update guides you through the patterns in the markets each Monday, Wednesday and Friday at the close.
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This article was syndicated by Elliott Wave International and was originally published under the headline What Junk Bonds Convey About Investors' Mindset. 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.

"I don't want to hear about it."

During a mania, "no prudent professional is perceived to add value"

By Elliott Wave International

"I don't want to hear about it."

That's the general response from many new retail investors here in 2021 when a veteran stock market observer expresses any hint of caution about the stock market.

This lack of respect for sober reflections about the market has been exhibited before.

Indeed, as far back as 1997, in a Special Report titled "Bulls, Bears and Manias," The Elliott Wave Theorist, a monthly publication which provides analysis of financial markets and cultural trends, said:

"A very human aspect of manias is that no prudent professional is perceived to add value. Indeed, the professional with a knowledge of history and value is eventually judged as an impediment to success."

Today's newbie investors are exhibiting this attitude in spades as expressed by the Wall Street Journal (Aug. 27):

Young investors are turning to a new generation of stock pickers -- many without formal training -- for advice. ... Staying popular means never criticizing a meme stock.

Yes, one of the keys to social media success for non-professional dispensers of stock picking advice is to always be bullish.

This ties in perfectly with the widespread sentiment among their social media followers that the market always goes up.

The October Elliott Wave Financial Forecast, a monthly publication which covers major U.S. financial markets, mentioned yet another financial mania trait:

Back in January 2000, the Elliott Wave Financial Forecast noted, "professionals and institutions that used to know better now pander to the stock-market dreams of the little guy." This time they're not just pandering with comments about a new era of retail dominance. Now the pros are copying the strategies of the little guy.

Getting back to the idea that the market always goes up, the only thing it will take for this maniacal mindset to be dramatically altered is a bear market.

Keep in mind that the current uptrend has extended for more than 12 years. Even so, as just discussed, investor psychology is even more extreme than 2000, or 2007, for that matter.

Now is the time to learn what the Elliott wave model has to say about the stock market's price pattern so you can prepare for what will take many investors -- both professionals and novices -- by surprise.

Right now, you can see EWI's U.S. market insights and analysis absolutely FREE.

Now through November 3, EWI is opening the doors to their flagship Financial Forecast Service. This is their most popular FreePass event ($411 value). That's for good reason. See why when you get your FreePass now.

This article was syndicated by Elliott Wave International and was originally published under the headline "I don't want to hear about it.". 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 "Losses Are the Norm" in the Stock Market

"I can measure the motions of bodies, but I cannot measure human folly."

By Elliott Wave International

Did you know that Sir Isaac Newton "lost his shirt" in the South Sea Bubble of the 1720s?

This great scientist and mathematician lost more than the equivalent of a million 2021 dollars.

Here's a brief description of Newton's investment actions from Robert Prechter's landmark book, The Socionomic Theory of Finance:

[Sir Isaac Newton] invested a little bit early in the trend and "wisely" took a small profit. Watching the trend continue, he finally bet heavily and "wisely" held on for the long run. He eventually sold out at a near-total loss.

After this financial loss, Newton said:

"I can measure the motions of bodies, but I cannot measure human folly."

Newton's unfortunate investment story is instructive because it summarizes why stock market losses have been the norm among investors after a full market cycle.

In other words, investors are typically "timid traders early in a bull market and confident long term holders at the peak."

To drive the point home more starkly, let's look at how investors made out in a mutual fund over a 10-year period versus the performance of the fund during the same time span.

Let's start with this Dec. 31, 2009 Wall Street Journal quote:

The decade's best performing U.S. diversified stock mutual fund [is] Ken Heebner's $3.7 billion CGM Focus Fund, which rose 18.2% annually. ...

Here's a table of the mutual fund, showing the growth of an initial $100,000 investment:

As you can see, that initial investment more than quintupled in value as it grew at 18.2% annually, compounded. Quite a performance in a decade when the S&P 500 lost value.

Now, let's look at how much money investors in the fund made.

Let's return to that 2009 Wall Street Journal article:

The typical CGM Focus shareholder lost 11% annually in the 10 years ending Nov. 30. ...

Yes, you read that right.

Let's return to The Socionomic Theory of Finance for a look at another table of the mutual fund:

The average investor in CGM Focus Fund during that 10-year period turned $100,000 into $31,200 for a loss of 68.8%. That is 94% less than the growth of the money in the fund.

The reason for that loss boils down to "herding" or "following the crowd."

As that Wall Street Journal article said:

These investor returns incorporate the effect of cash flowing in and out of the fund. Shareholders often buy a fund after it has had a strong run and sell as it hits bottom.

If you'd like to learn how Elliott waves reflect the repetitive patterns of "crowd behavior," you are encouraged to read the Wall Street classic, Elliott Wave Principle: Key to Market Behavior, by Frost & Prechter. Here's a quote from the book:

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.

You can access the online version of the book for free after you become a Club EWI member. Club EWI is the world's largest Elliott wave educational community and is free to join. As a Club EWI member, you'll enjoy free access to a wealth of Elliott wave resources on investing and trading without any obligations.

Follow this link to get started right away: 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 "Losses Are the Norm" in the Stock Market. 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 a Peak in Home Prices May Be Approaching

"Is it a good time to sell a house?"

By Elliott Wave International

Some people buy a house solely as an investment.

Others want a better place to live -- perhaps more room for a growing family. The investment part is secondary. However, even people in this category would likely hold off on a purchase if they had an indication that lower home prices were just around the corner.

Well, there is such an "indication."

First, a little historical context: In 2005, near the peak of the prior housing bubble, a University of Michigan survey asked participants, "Is it a good time to sell a house?"

In August, September and October of that year, a then-record high percentage of participants said "yes." Eight months later, in June 2006, U.S. home prices topped.

With that in mind, the September Elliott Wave Financial Forecast, a monthly publication which provides analysis of major U.S. financial markets, explains what that same survey recently revealed:

[A] series of questions in the University of Michigan monthly sentiment survey tracks attitudes toward home prices. ... This chart shows affirmative responses to the question "Is it a good time to sell a house?" ... The latest reading of 48 is twice the peak reading at the end of the last housing boom. [This is] a more-than doubling from March to June of this year. [emphasis added]

This sentiment survey may not be a precise timing indicator. Recall the eight-month timespan between the 2005 survey findings and the 2006 peak in home prices. Yet, it is still a "heads up."

Also keep in mind this astounding headline (Marketwatch, Sept. 30):

Home prices have risen 100 times faster than usual during the COVID-19 pandemic [emphasis added]

So, in at least one way, the current housing mania is even more stark than the last one.

Of course, home prices might climb even higher... or not. Is there a way to go beyond guessing, though?

Yes. The stock market and housing prices tend to be correlated. If you know what's likely next for stocks, big-picture, then you also know what's likely next for real estate.

The best way to determine what is next for the stock market is to employ the Elliott wave model.

Here's what Frost & Prechter said in their Wall Street classic, Elliott Wave Principle: Key to Market Behavior:

It is our practice to try to determine in advance where the next move will likely take the market. One advantage of setting a target is that it gives a sort of backdrop against which to monitor the market's actual path. This way, you are alerted quickly when something is wrong and can shift your interpretation to a more appropriate one if the market does not do what you expect. The second advantage of choosing a target well in advance is that it prepares you psychologically for buying when others are selling out in despair, and selling when others are buying confidently in a euphoric environment.

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.

If you'd like to read the entire online version of the book, you may do so for free when you become a Club EWI member. Club EWI is the world's largest Elliott wave educational community with about 350,000 members.

It costs nothing to join Club EWI and members are under no obligations. At the same time, Club EWI members enjoy free access to a wealth of Elliott wave resources on investing and trading.

Follow the link to have this definitive text on the Wave Principle on your computer screen in just a few minutes: 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 a Peak in Home Prices May Be Approaching. 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 What Really Sets Interest Rates (Not Central Banks)

See "powerful evidence that the Fed is not in control of interest rates"

By Elliott Wave International

Most everyone is familiar with the phrase: "Keep your eye on the ball," which of course means -- focus on what really matters.

Those who seek clues about the direction of interest rates believe the "ball" is their nation's central bank.

For example, in the U.S., Federal Reserve announcements are the subject of countless financial headlines, like this one from Sept. 22 (Reuters):

Fed signals bond-buying taper coming 'soon,' rate hike next year

The assumption in most of these headlines is that the central bank determines the direction of rates.

However, if interest-rate observers kept their eye on what really matters, they'd be watching the bond market instead of the central bank. In other words, markets lead and central banks follow.

Sticking with the U.S., this chart and commentary from Robert Prechter's 2017 book, The Socionomic Theory of Finance, provide elaboration:

[The chart] plots T-bill rates and the effective federal funds rate (a weighted average of the federal funds rate across all banking transactions) from 1978 to 1984. T-bill rates peaked four times in 1980-1982. Each of those peaks occurred a month or more before subsequent and reactive peaks in the federal funds rate. The Fed's rate also lags at bottoms, as depicted on the chart at the lows of 1980, 1981 and 1982-3.

The book adds:

That interest rates were in a relentless upward trend during the entire decade of the 1970s and that they have been stuck at zero since 2008 -- in both cases despite the Federal Reserve's contrary desires -- is powerful evidence reinforcing the point that the Fed is not in control of interest rates.

The same principle holds in other nations, like Australia or the United Kingdom.

Here's another chart and additional commentary from The Socionomic Theory of Finance:

[The chart] plots interest rates on the U.K.'s freely-traded, 3-month government bond against the Bank of England's (BOE's) official daily bank-lending rate. These lines show that the BOE's rate-setting actions have lagged the freely traded debt market at all twelve major turning points in rates since 1993. The lags vary from two to nine months, and the average lag is 4.8 months.

The major takeaway is that central banks' interest-rate decisions are not proactive but reactive.

Another widely held misconception is that news drives financial markets, like stocks.

Here's insight on that pervasive assumption from Frost & Prechter's Wall Street classic, Elliott Wave Principle: Key to Market Behavior:

Sometimes the market appears to reflect outside conditions and events, but at other times it is entirely detached from what most people assume are causal conditions. The reason is that the market has a law of its own. It is not propelled by the external causality to which one becomes accustomed in the everyday experiences of life. The path of prices is not a product of news. Nor is the market the cyclically rhythmic machine that some declare it to be. Its movement reflects a repetition of forms that is independent both of presumed causal events and of periodicity.

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

If you'd like to read the online version of this "definitive textbook on the Wave Principle," you may do so for free once you become a Club EWI member.

Club EWI is free to join and allows members free access to a wealth of Elliott wave resources on financial markets, investing and trading -- without any obligations.

Here's the link to follow for free and unlimited access to the 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 What Really Sets Interest Rates (Not Central Banks). EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Will China's Crackdown Send Bitcoin's Price Tumbling?

July 2: "Bitcoin [is] at or near the end of [an Elliott wave] correction"

By Elliott Wave International

In early September, bitcoin hit a price level near $52,000 -- however, since then, the price has trended lower.

Indeed, on September 24 alone, the price of the cryptocurrency fell 5%.

The financial press pinpointed a supposed "cause":

Bitcoin and ether slide as China intensifies crackdown on cryptocurrencies

A China crackdown on cryptocurrencies seems like a logical "reason" for bitcoin's 5% slide, however, take a look at this next headline from the same financial website:

China's war on bitcoin just hit a new level with its latest crypto crackdown

You might say, "OK, it says pretty much the same thing as the first headline, what's the point?"

The point is: That second headline published on July 7 -- just two weeks before bitcoin hit a bottom near $29,000 and then rose to that price near $52,000 in early September.

In other words, China's stern measures against cryptocurrencies are nothing new and bitcoin prices have both risen and fallen during the crackdown.

Instead of relying on headlines, Elliott Wave International's head crypto analyst Tony Carrion uses the Elliott wave model to forecast cryptocurrencies.

Here's what he said in the July 2 Global Market Perspective, a monthly Elliott Wave International publication which covers 50+ worldwide financial markets:

Our preferred count has been to consider the price action since the December 2018 low to be the subwaves of a [sizeable Elliott wave] advance.

Bitcoin [is] at or near the end of [an Elliott wave] correction.

In other words, Tony was anticipating a rebound in bitcoin's price, even as the majority of investors were bearish.

That's the beauty of the Elliott wave model -- it anticipates price turns -- no matter what the news or prevailing sentiment.

You may have heard about that recent University of Chicago survey that said more than 1 in 10 people in the U.S. traded cryptocurrencies in the past year. Yeah, a lot of people.

No doubt, many of them are influenced by cryptocurrency headlines and forecasts that range from the wildly bullish (at least one headline said bitcoin was headed to $500,000) to the extremely bearish (more than one prognosticator has said bitcoin is headed to zero).

If you're among the many cryptocurrency traders, you owe it to yourself to get the objectivity of Elliott wave analysis.

As Frost & Prechter said in their Wall Street classic, Elliott Wave Principle: Key to Market Behavior:

Despite the fact that many analysts do not treat it as such, the Wave Principle is by all means an objective study, or as [Charles J.] Collins put it, "a disciplined form of technical analysis." [A. Hamilton] Bolton used to say that one of the hardest things he had to learn was to believe what he saw. If you do not believe what you see, you are likely to read into your analysis what you think should be there for some other reason. At this point, your count becomes subjective and worthless.

If you'd like to delve into the details of how the Wave Principle can help you objectively analyze financial markets, you can read the entire online version of the book for free.

All that's required for free access is a Club EWI membership. Club EWI is free to join and allows members free access to a wealth of Elliott wave resources on financial markets, investing and trading without any obligations.

Just follow 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 Will China's Crackdown Send Bitcoin's Price Tumbling?. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.