Why Most Investors Are "Doomed" to Miss Major Market Turns

"The arrows show how conventional futurists approach forecasting"

By Elliott Wave International

The reason why most investors miss key turns in financial markets is that they linearly extrapolate a trend into the future.

If a market is going down, these investors expect that market to continue to go down and if it's going up, they expect it to continue to go up.

In other words, most investors have no method for anticipating a turn. By contrast, the Elliott wave model does.

The September Elliott Wave Theorist, a monthly publication which provides analysis of financial and major cultural trends, provides insight with this graph and commentary:

[The chart] depicts the fractal movements of the stock market as described by an idealized version of the Elliott wave model. The arrows show how conventional futurists approach forecasting. Because they project trends linearly, they are most convinced of an old trend's continuation at the very time when waves at several degrees of trend are culminating.

That's not to say that Elliotticians are perfect. Even those who use the Elliott wave model in their market analysis might make the mistake of looking for too many turns.

As the new Elliott Wave Theorist also says:

Being patient while an Elliott wave plays out can be challenging for a mind bent on looking for evidence of change. But at least Elliotticians are not doomed to miss every turn. They may be early or late, but they are not inevitably, pathologically late in identifying turns, as linear extrapolators are.

A recent example of how linear extrapolation almost immediately hurt investors occurred with technology stocks.

This is a Sept. 13 headline and sub-headline from Bloomberg:

Billions in Wrong-Way Bets Poured Into Biggest Tech ETF
Biggest tech ETF posted best inflow since February on [Sept. 12]

On that one date alone (Sept. 12), investors put $2.6 billion into the Invesco Trust Series 1 ETF. The very next day (Sept. 13), the NASDAQ cratered 5.16%. Talk about bad timing!

You see, the NASDAQ had rallied for four straight days before that big price slide, and many investors thought it was time to jump in and join the party.

That's not to say that the Elliott wave model anticipated a more than 5% drop in the NASDAQ on that very day. However, the Elliott wave model had anticipated a continuation of the downward trend.

Indeed, on Friday, Sept. 9, our U.S. Short Term Update stated:

The [NASDAQ 100] rally should be complete or nearly so.

That analysis was provided just two trading days before that big one-day decline in the NASDAQ.

No analytical method can provide a guarantee, however, in our view, the Elliott wave model is far better than linearly extrapolating trends.

If you'd like to learn the details of the Elliott wave model, the definitive text on the subject is Frost & Prechter's Elliott Wave Principle: Key to Market Behavior. Here's a quote:

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. Many of these guidelines are specific and can occasionally yield stunningly precise results. If indeed markets are patterned, and if those patterns have a recognizable geometry, then regardless of the variations allowed, certain price and time relationships are likely to recur. In fact, experience shows that they do.

If you'd like to read the entire online version of the book for free, you can do so by joining Club EWI, the world's largest Elliott wave educational community.

A Club EWI membership is free, and members enjoy complimentary access to a treasure trove of Elliott wave resources on financial markets, investing and trading -- including videos and articles from Elliott Wave International's analysts.

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

This article was syndicated by Elliott Wave International and was originally published under the headline Why Most Investors Are "Doomed" to Miss Major Market Turns. 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.

Bear Market Rallies: Here's a Key Insight

How investors get snookered into the belief of "a further market advance"

By Elliott Wave International

Nothing raises the hopes of the bullishly inclined like a rapid bear market rally. And there's been several since the early January top in the Dow Industrials and S&P 500 index.

You may be interested in a key characteristic of most of these rallies.

The Sept. 12 U.S. Short Term Update, a thrice weekly Elliott Wave International publication which provides near-term analysis of major U.S. financial markets, explains with this chart and commentary:

Sometimes the upward push will end at or near top tick of the daily range. A quick glance at the countertrend rallies since the January peak in the S&P shows at least five instances of this happening, indicated by the red arrows on the chart. The final trade of these daily ranges was at or very near the high of the day, creating belief in a further market advance when in fact it was the top of the rally.

Keep in mind that "not every strong up day that closes at top tick marks the end of the rally but the end of the rally is often attended by strong up days that close at top tick."

That said, here are just a couple of examples in recent months of the lingering optimism:

• Why There's a Chance the Stock Market Has Hit Bottom (Barron's, July 19)
• Top Investment Ideas for a Market That Might Have Hit Bottom (Bloomberg, Aug. 4)

In other words, memories of the prior bull market die hard, even several months after the S&P 500's record high near the start of the year.

And, regarding those July and August headlines about a market bottom, that didn't turn out to be the case. Here's a Sept. 16 headline (CNBC):

FedEx plunge could spell bad days ahead for market as bellwether Dow Transports index hits new low

The question is: Will other indexes -- like the S&P 500 and Dow Industrials -- also plunge to new lows?

Now is the time to familiarize yourself with the U.S. stock market's Elliott wave pattern.

If you're new to Elliott wave analysis or need a refresher, do know that the definitive text on the topic is Frost & Prechter's book, Elliott Wave Principle: Key to Market Behavior. Here's a quote from this Wall Street classic:

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. Among those, the best interpretation, sometimes called the "preferred count," is the one that satisfies the largest number of guidelines.

If you'd like to read the entire online version of Elliott Wave Principle: Key to Market Behavior, you may do so for free after you join Club EWI, the world's largest Elliott wave educational community (about 500,000 worldwide members and growing rapidly).

A Club EWI membership is free and allows you free access to a wealth of Elliott wave resources on financial markets, investing and trading without any obligation. Those resources include exclusive videos and articles from Elliott Wave International's analysts.

Just follow the link, and you'll be on your way to becoming a Club EWI member: Elliott Wave Principle: Key to Market Behavior -- get instant and free access now.

This article was syndicated by Elliott Wave International and was originally published under the headline Bear Market Rallies: Here's a Key Insight. 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 You Should Be Leery of the 60 / 40 Portfolio

"The tidal wave of risk assumption … may be turning"

By Elliott Wave International

Many investors allocate a percentage of their portfolios to bonds to cushion against a drop in the stock market.

A popular allocation is a 60 / 40 mix of stocks and bonds.

However, this hasn't worked out recently. Here's a Yahoo! Finance headline (Sept. 6):

The 60/40 strategy is on pace for its worst year since 1936: BofA

The mix of 60% stocks and 40% bonds was down 19.4% from the start of the year through the end of August, according to Bank of America Global Research.

Specifically, the S&P 500 declined more than 16% through that period with long-term Treasuries sinking more than 20%. Investment grade corporate bonds were down 13%.

Investors who thought bonds would provide a degree of financial "safety" may not have been aware of Elliott Wave International's forecasts.

Indeed, back in March 2020, our Global Market Perspective, an Elliott Wave International monthly publication which provides analysis of 50-plus worldwide financial markets, showed this graph of yields on global bonds, 10-year U.S. Treasury notes and U.S. general obligation municipal bonds (commentary below the graph):

According to 150 years' worth of data... this is the first time that 10-year Treasury note yields have dropped below 1%. Grand Supercycle-degree tops set Grand Supercycle records. Investor ebullience is the only thing that allows for an embrace of no-yield debt. The tidal wave of risk assumption, however, may be turning.

In other words: Expect the downward trend in yields to turn upward.

Shortly after that March 2020 analysis in our Global Market Perspective published, yields began to climb (meaning bond prices began to sink).

In fact, on Sept. 13, yields on 2-year U.S. Treasuries jumped to their highest level since 2007. On the same day, the Dow Industrials registered a 3.94% decline.

Speaking of stocks, here too, our Global Market Perspective provided timely warnings. Our Dec. 2021 issue stated:

Junk [bond] yields should rise while stocks decline... The Wave Principle suggests that the era of space flight for financial assets is over. [emphasis added]

The Dow Industrials hit a top a month later.

Not every forecast based on the Wave Principle works out to a "T," however, the Elliott wave model is the best analytical method of which we know.

If you’d like to learn the details of the Wave Principle, the definitive text on the subject is Frost & Prechter’s Elliott Wave Principle: Key to Market Behavior. Here’s a quote from the book:

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. Many of these guidelines are specific and can occasionally yield stunningly precise results. If indeed markets are patterned, and if those patterns have a recognizable geometry, then regardless of the variations allowed, certain price and time relationships are likely to recur. In fact, experience shows that they do.

You may be interested in knowing that you can access the entire online version of this Wall Street classic for free once you become a member of Club EWI, the world’s largest Elliott wave educational community.

A Club EWI membership is free and opens the door to a wealth of Elliott wave resources on investing and trading.

Get started by following this link: Elliott Wave Principle: Key to Market Behavior – get instant and free access now.

This article was syndicated by Elliott Wave International and was originally published under the headline Why You Should Be Leery of the 60 / 40 Portfolio. 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 Another "Great Depression" Start in Europe?

This action by investors resulted in "the highest total since 2014, and probably ever"

By Elliott Wave International

Many people are familiar with the Great Depression of the early 1930s, but most of them may not know that this economic calamity began in Europe before arriving in the U.S., as a past issue of the Global Market Perspective has noted (the Global Market Perspective is a monthly Elliott Wave International publication which covers 50-plus worldwide financial markets).

In Germany, for instance, consider that real GDP fell 1% in 1929 after growing 8.2% in 1927 and 2.8% in 1928. Other economic indicators hit a peak as early as 1927.

Only time will tell if history repeats. Yet, here in 2022, we do know that troubling signs are developing in Europe's biggest economy.

First, look at this recession indicator from the August Global Market Perspective with the commentary below:

Companies in Germany are seeing "softer demand for their products amid a darker economic outlook." (Bloomberg, 7/4/22) Germany's GDP also stagnated in July. More importantly, the economy recorded a 0.5% drop in overseas sales while imports were up 2.7%, meaning that the country recorded its first trade deficit since 1991. While deficits themselves are not recessionary, the change in behavior is notable, and, in case you're wondering, 1991 was indeed a recession year.

Since this analysis published, an August 22 Reuters headline said:

German recession increasingly likely, Bundesbank says

Some of Germany's neighbors are likely already experiencing economic contractions -- like Estonia and Latvia. Other economies -- Austria, Belgium, Luxembourg and Portugal -- registered shrinking GDPs in Q2.

Getting back to Germany, here's more commentary and another chart from the August Global Market Perspective:

The bottom graph on this chart shows the market capitalization of German companies as a percentage of worldwide market cap. Notice that it has been declining since its high point in 2008. ... The percentage has dipped relentlessly lower, falling to an all-time low of 1.92% just two weeks ago. Today, among Germany's largest four companies, only one ranks among the world's 100 largest.

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This article was syndicated by Elliott Wave International and was originally published under the headline Will Another "Great Depression" Start in Europe?. 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 a Potential Signal for What May Be Next for U.S. Stocks

This action by investors resulted in "the highest total since 2014, and probably ever"

By Elliott Wave International

Frost & Prechter's Wall Street classic book, Elliott Wave Principle: Key to Market Behavior, first published nearly 45 years ago and said:

"Eight years of a raging bear market have taught today's investor to be cautious, conservative and cynical. Defensiveness is not in evidence at tops."

Considering this description of investors' mindset in the late '70s and early '80s, many market observers were not contemplating the start of a big bull market.

Yet, Elliott Wave Principle did forecast a major uptrend and that's what happened.

Bull markets are generally born after investor sentiment has reached a negative extreme.

Here in the late summer of 2022, there's the opposite mindset. Instead of playing "defense," investors are aggressively on the offense -- and in at least one sector -- by a record degree.

Consider this chart and commentary from the August Elliott Wave Financial Forecast, a monthly publication which provides coverage of major U.S. financial markets:

The depth of the dip-buying zeal is evident by a late-July retail surge into technology stocks. Investors pushed about $580 million into a basket of tech stocks, the highest total since at least 2014, and probably ever. "I'm extremely bullish tech stocks," one 27-year-old investor told The Wall Street Journal. The FAANG stocks -- Facebook (Meta), Apple, Amazon, Netflix and Google (Alphabet) -- and various ancillary issues are once again the big favorites.

Some professional investors are also gung-ho on tech stocks (CNBC, August 28):

[Famous Market Pundit]: I will not abandon tech stocks because the end of their downturn is near

This well-known stock picker might be right. Yet, keep in mind that stocks which lead on the way up tend to lead on the way down.

Also keep in mind that stocks in the technology sector are not the only focus of investors. According to a poll by deVere Group, a Zurich-based asset management firm, "56% of Investors Plan to Buy More Stock Before 2022 Ends."

And here's another CNBC headline (August 26):

S&P will be at 4,400 by year end, says "chief equity strategist"

In other words, the complete lack of "defensiveness" is likely a signal that stocks are not set to kick off another major uptrend.

The stock market's Elliott wave pattern can help you gain more insight into what to expect next for the main indexes.

If you'd like to learn about Elliott wave patterns, or simply need a refresher, the book which was mentioned earlier -- Elliott Wave Principle: Key to Market Behavior -- is an ideal resource. Here's a quote:

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.

You may be interested in knowing that you can read the entire online version of the book for free.

The only requirement for free access is a Club EWI membership -- which is also free. In case you're unfamiliar with Club EWI, it's the world's largest Elliott wave educational community and members enjoy complimentary access to a wealth of Elliott wave resources without any obligation.

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

This article was syndicated by Elliott Wave International and was originally published under the headline Here's a Potential Signal for What May Be Next for U.S. Stocks. 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.

Was It Really the Fed That Sent Stock Prices Tumbling?

"Stocks have the strong potential to continue lower as prices trace out..."

By Elliott Wave International

Elliott Wave International has mentioned time and again that the mainstream financial media nearly always mentions a news development as the reason for a given day's stock market action.

More than that, we've provided example after example of how these so-called explanations usually don't hold water.

For example, on August 26, when the Dow Industrials closed lower by just over 1,000 points, a headline said (Marketwatch):

Dow closes down 1000 points, Nasdaq falls 3.9% after Powell warns of pain to households in inflation battle

That "warning" was given by Fed Chairman Powell in Jackson Hole, Wyoming when he basically said that the central bank will continue with its aggressive rate hikes.

However, this stance by the Fed is nothing new, and indeed, the stock market staged a significant rally since mid-June. All the while, the Fed had been hawkish.

Here's a Forbes headline from July 27:

Dow Jumps 400 Points After Fed Hikes Rates By 75 Basis Points

There have been other similar headlines during the stock market's two-month rally.

So, how can Fed rate hikes be bullish one day but bearish at another time?

Our decades-long observations here at Elliott Wave International is that news does not drive stock prices in the first place -- contrary to popular belief.

The stock market is driven by investor psychology, which is reflected in the repetitive patterns of the Elliott wave model.

Indeed, before the 643-point drop in the Dow on August 22, and the 1008-point plunge on August 26, the August 19 U.S. Short Term Update (a thrice weekly Elliott Wave International publication which provides near-term forecasts for major U.S. financial markets) said:

As the week wore on, selling strength became more intense. On Wednesday, August 17, the NYSE advance/decline ratio was negative by 4.30-to-1. Today's closing a/d ratio was negative by 6.32-to-1. The same with Big Board up and down volume. Down volume as a percentage of up and down volume was 81.4% on Wednesday and today it was 86%. Stocks have the strong potential to continue lower as prices trace out declining impulse patterns at various degrees of trend. [emphasis added]

In other words, patterns of the Elliott wave model were strongly suggesting further decline -- regardless of what the Fed chairman said or didn't say.

If you'd like to learn about the Elliott wave model, an excellent book on the subject is Elliott Wave Principle: Key to Market Behavior, by Frost & Prechter. Here's a quote from this Wall Street classic:

All waves may be categorized by relative size, or degree. The degree of a wave is determined by its size and position relative to component, adjacent and encompassing waves. [Ralph N.] Elliott named nine degrees of waves, from the smallest discernible on an hourly chart to the largest wave he could assume existed from the data then available. He chose the following terms for these degrees, from largest to smallest: Grand Supercycle, Supercycle, Cycle, Primary, Intermediate, Minor, Minute, Minuette, Subminuette. Cycle waves subdivide into Primary waves that subdivide into Intermediate waves that in turn subdivide into Minor waves, and so on. The specific terminology is not critical to the identification of degrees, although out of habit, today's practitioners have become comfortable with Elliott's nomenclature.

You can learn more about the Wave Principle by reading the entire online version of the book for free!

The only requirement for free access is a Club EWI membership -- which is also free.

Club EWI is the world's largest Elliott wave educational community and members enjoy complimentary access to a wealth of Elliott wave resources on investing and trading -- without any obligations.

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

This article was syndicated by Elliott Wave International and was originally published under the headline Was It Really the Fed That Sent Stock Prices 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.