Major Fed Myth: Debunked

The Fed is reactive in setting rates – not proactive

By Elliott Wave International

The days of near-zero interest rates are long gone -- at least for now.

As we look back on 2022, we know that it's been a year of rising interest rates, and many observers say it's all due to the Fed.

But it's a flat-out myth that the Fed determines the trend of interest rates. The market does. The Fed merely follows.

Here's a chart and commentary from the December Elliott Wave Theorist, a monthly publication since 1979 which covers major financial and cultural trends:

The chart updates the Fed's interest-rate activity since mid-2021. As you can see, the Fed's rate changes have continued to lag rate changes in T-bills as set by the market. The Board's decisions are not magical or even thoughtful. They look at the market rate, and they adjust the Fed Funds Rate accordingly. That's all there is to it. That's all there ever has been to it.

So, given that the market sets rates and the Fed follows, a key takeaway is that the Fed's interest-rate actions produce no outcomes (for example, "stepping on the brakes" of the economy) that wouldn't have happened through regular market forces.

Other central banks around the world also lag the market. Consider the European Union. Here's a historical snapshot from Robert Prechter's book, The Socionomic Theory of Finance:

The chart plots monthly data for the interest rate of the freely-traded, 3-month euro generic government bond versus the European Central Bank's (ECB's) main refinancing operations rate, which is Europe's equivalent to the U.S. federal funds rate. As these graphs show, rate-setting actions by the ECB have lagged the freely traded debt market at all seven major turning points in interest rates since 1999. The lags vary from one to ten months, and the average lag is 5.3 months.

You can find the same principle at work in the United Kingdom, Australia and other global central banks.

It may be difficult for central bank watchers to latch onto the idea that markets guide central banks rather than the other way around. Yet, no data show otherwise.

The December Elliott Wave Theorist provides you with more financial insights, including warning signs about the stock market.

And, speaking of warning signs about the stock market, you may want to become familiar with the Dow Industrials' Elliott wave pattern -- which can help you to anticipate what's next.

As Frost & Prechter's Wall Street classic, Elliott Wave Principle: Key to Market Behavior, notes:

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 failures in financial affairs.

If you'd like to learn the details of the Wave Principle, here's good news: You can access the entire online version of the book for free once you become a member of Club EWI, the world's largest Elliott wave educational community.

Joining Club EWI is a great way to start 2023 because all the free Elliott wave resources which accompany a Club EWI membership will help to provide you with an independent perspective on financial markets which you may not be getting from other sources.

And, by the way, a Club EWI membership itself is also free.

So, get started now 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 Major Fed Myth: Debunked. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Stocks: How Sentiment Measures Offer Clues About What's Likely Next

Insights into the stock market as a fractal

By Elliott Wave International

Elliott Wave International's analysts track dozens of indicators, and our U.S. Short Term Update pays particular attention to those which may offer clues about the near-term.

Consider this analysis from the Sept. 26 U.S. Short Term Update, a thrice weekly Elliott Wave International publication which provides analysis of near-term trends of major U.S. financial markets:

Short term measures of investor sentiment indicate excess pessimism. ... Stocks should start a countertrend rally to relieve the downside compression.

No analytical method can guarantee an exact day and time a forecast will be fulfilled -- if it's fulfilled at all. However, some 13 trading days later, the Dow did hit a low. By Nov. 30, the senior index was more than 5,000 points higher. Excess pessimism had morphed into excess optimism. Fear had morphed into complacency.

Indeed, the November Elliott Wave Theorist, a monthly publication which provides analysis of financial markets and major cultural trends, noted:

By several measures, optimism at the current time is equal to or greater than that which held sway at the broad market's all-time high in November 2021 and at the blue chips' all-time high in January 2022!

The stock market pendulum usually starts to swing the other way when an extreme is reached -- in this case, extreme optimism. So, it hasn't been surprising that prices have mainly trended lower since around the beginning of December -- at least, so far.

So, are investors forever locked in to short-term swings between optimism and pessimism?

We all know the answer is "no" from looking at historic stock market charts. We see that short-term trends are part of intermediate term tends, which, in turn, are part of even larger trends and so on. In other words, the stock market is a fractal.

Here's an illustration and commentary from Robert Prechter's book, Last Call:

In 1938, Ralph Nelson Elliott ... described the fluctuation of stock market prices as a fractal. He illustrated a patterned fractal in which movements in aggregate stock prices trace out five waves (of a certain description) in the direction of the one larger trend and three waves (or combinations thereof) in the countertrend direction.

[The illustration] is a stylized depiction of a full cycle of Elliott waves, with their traditional labels.

Key things for an investor to know is whether the "larger trend" is up or down, and the current juncture of the market in that larger trend.

You can get more insights into Elliott waves by reading Frost & Prechter's Wall Street classic, Elliott Wave Principle: Key to Market Behavior. Here's a quote from the book:

After you have acquired an Elliott "touch," it will be forever with you, just as a child who learns to ride a bicycle never forgets. Thereafter, catching a turn becomes a fairly common experience and not really too difficult. Furthermore, by giving you a feeling of confidence as to where you are in the progress of the market, a knowledge of Elliott can prepare you psychologically for the fluctuating nature of price movement and free you from sharing the widely practiced analytical error of forever projecting today's trends linearly into the future. Most important, 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.

Good news: You can access the entire online version of the book for free once you become a member of Club EWI, the world's largest Elliott wave educational community.

A Club EWI membership is also free and allows for complimentary access to a wealth of Elliott wave resources on investing and trading.

A wonderful world of Elliott wave education awaits you! Join Club EWI now 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 Stocks: How Sentiment Measures Offer Clues About What's Likely Next. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Stocks and Economy: Why 2022 May Have Just Been the Preview

"Fight the inertia that will keep you from taking action to prepare for the downturn"

By Elliott Wave International

The main show is likely about to begin.

2022 may have just been a preview of what's ahead for stocks and the economy, which Robert Prechter's Last Chance to Conquer the Crash warned about nearly a year ago, and our Global Market Perspective discussed at the start of 2022.

Let's start with that warning from the January 7, 2022 Global Market Perspective, a monthly Elliott Wave International publication which covers 50-plus worldwide financial markets, via these charts and commentary:

The blue-chip Dow Industrials and S&P 500 ... managed to eke out new highs in the first two trading days of 2022. There is a good chance that Wednesday's trend reversal is the start of a long-term decline.

The "Wednesday" referenced was Jan. 5 and indeed, an all-time high for the Dow Industrials occurred on that very date, with the S&P 500 hitting its high on Jan. 4. Mind you, the Global Market Perspective's forecast was made in real-time -- just two and three days, respectively, after those all-time highs registered.

As you know, the blue-chips have been in a downtrend since, albeit accompanied by some very sharp rallies -- which is not unusual during downtrends.

Let's now turn our attention to Robert Prechter's Last Chance to Conquer the Crash, which, as a reminder, published nearly a year ago and warned of a major economic contraction ahead. This is from the book:

Fight the inertia that will keep you from taking action to prepare for the downturn. Start taking steps now. ... Think globally, not just domestically.

Yes, when the good times are rolling and stock market indexes are reaching new all-time highs, it can seem unnecessary to prepare for a downturn.

But, as you read these headlines, many people likely wished they had:

• Household wealth down by $13.5 trillion in 2022, second-worst destruction on record (Marketwatch, Dec. 9)
• Tech Layoffs in U.S. Send Foreign Workers Scrambling to Find New Jobs (The New York Times, Dec. 9)
• Economists: A US housing recession has already arrived (The Hill, Dec. 7)
• Defaults Loom as Poor Countries Face an Economic Storm (The New York Times, Dec. 3)
• The UK economy is sliding into recession and Europe is set to follow (CNN, Nov. 11)
• China's super-rich see fortunes plunge as economy slows (The Guardian, Nov. 7)

There are many more similar headlines.

The stance of Elliott Wave International is that these headlines represent only an inkling of what's likely ahead.

Keep in mind that the stock market leads and the economy follows. In other words, a downturn in the stock market is generally followed by a downturn in the economy and an upturn in the stock market is generally followed by improving economic conditions.

So, it would be a good idea to keep on top of the Elliott wave pattern of the stock market in which you are interested -- whether it's the U.S., another nation or many nations. Elliott wave analysis will help you to anticipate what's next for a given stock market index or indexes. Hence, you can also anticipate what's down the road for the economy. As you might imagine, Elliott wave analysis offers no guarantees, but it's the best analysis of financial markets of which Elliott Wave International knows.

If you're unfamiliar with Elliott wave analysis and would like to learn about it, read Frost & Prechter's Elliott Wave Principle: Key to Market Behavior -- the definitive text on the Elliott wave model. 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.

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 entire online version of this Wall Street classic, you may do so for free once you join Club EWI -- the world's largest Elliott wave educational community. A Club EWI membership is also free and allows you complimentary access to a wealth of Elliott wave resources on investing and trading.

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

This article was syndicated by Elliott Wave International and was originally published under the headline Stocks and Economy: Why 2022 May Have Just Been the Preview. 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.

60% stocks, 40% bonds? Ha!

So much for the conventional wisdom of the "balanced portfolio"

By Elliott Wave International

In his February 2022 book, Last Chance to Conquer the Crash, Robert Prechter said:

Countless advisors have counseled "diversification," a "balanced portfolio" and other end-all solutions to the problem of allocating your investments. These approaches are delusional. ... No investment strategy will provide stability forever.

That certainly has applied to the classic 60% stocks / 40% bonds portfolio this year.

On Oct. 14, a Reuters headline said:

'60/40' Portfolios Are Facing Worst Returns in 100 Years: BofA

Of course, everyone knows that stocks are risky, but many investors expect bonds to provide a cushion in case equities slide into a downtrend. And, indeed, the stock market has been trending lower since January.

But bond prices have taken a hit, too. A BIG one. As you probably know, bonds prices decline when yields rise and that's what's taken place.

You may find it hard to believe, but Elliott wave patterns and sentiment readings in the bond markets warned of this. For example, the July 2021 Elliott Wave Theorist, a monthly publication (since 1979) which analyzes financial markets and major cultural trends, showed this chart and said:

U.S. Treasury bill rates have edged closer and closer to zero for over a year. The complacency about the nonexistent T-bill yield in the face of unprecedented inflating by the government and the Fed is truly amazing. ... The Fed's cavalier inflating is borne of optimism. ... When optimism and complacency finally melt like popsicles in the sun, the lines in [the chart] will turn up.

During that same month / year (July 2021), The New York Times ran this headline:

Federal Reserve Officials Project Rate Increases in 2023 [emphasis added]

This next chart of the 6-month U.S. Treasury bill yield, which published in the Nov. 18, 2022 Elliott Wave Theorist, shows what we all know: Rates began to turn up more than a year before 2023 and then soared higher.

The question now is: What's next?

Elliott wave analysis answered this question before, and it can help you answer it now.

You can read more about what Elliott Wave Theorist editor, and EWI Founder, Robert Prechter expects next in the Special Report: Preparing for Difficult Times. The report is free -- for a limited time -- inside their "12 Days of Elliott" event. You need only join Club EWI to read it, along with 11 other fascinating resources, December 1-12.

You can join Club EWI without any cost or obligation. All the while, you'll enjoy complimentary access to an abundance of Elliott wave resources on financial markets and investing.

Get started by following the link: 12 Days of Elliott -- get free and instant access.

This article was syndicated by Elliott Wave International and was originally published under the headline 60% stocks, 40% bonds? Ha!. 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.

U.S. Dollar: Has the Mainstream Been Way Too Confident?

Meanwhile, greenback's Elliott waves are showing the way

By Elliott Wave International

Investors who use Elliott wave analysis know that the main price trend of a financial market subdivides into five waves.

Also know that wave 1 and wave 5 are often approximately equal in length.

That knowledge helped the Global Market Perspective, a monthly Elliott Wave International publication which covers 50-plus financial markets, make a successful call on the U.S. Dollar index.

The November issue showed a monthly chart which dates back more than 14 years and said:

The U.S. Dollar Index continues to look like it's topping. The index is testing the level where wave (5) would equal wave (1), a common relationship.

Keep in mind that Global Market Perspective subscribers get to see all the wave labeling.

With the benefit of hindsight, we now know that the top registered on Sept. 28 -- still, that doesn't discount the fact that the topping process was recognized by using Elliott wave analysis.

Since that analysis on Nov. 4, the U.S. Dollar Index has declined in price.

Another giveaway that the greenback was headed for a tumble is that the mainstream seemed to be growing a bit too confident about the prospect for a further rise in the index. These two magazine covers provide examples of that:

The late analyst Paul Macrae Montgomery showed over the years that specialist industry magazines sometimes highlight financial trends on their covers just as those trends are ending.

Of course, Elliott wave analysis nor any indicator -- such as the magazine cover indicator -- can offer a guarantee about future market action, but the Elliott wave model and many time-tested indicators have proven to be quite useful throughout different market cycles.

If you'd like to learn about the Elliott wave model, know that the definitive text on the subject is Frost & Prechter's Wall Street classic, Elliott Wave Principle: Key to Market Behavior. Here's a quote from the book which should be in every serious investor's library:

[R.N.] Elliott himself never speculated on why the market's essential form is five waves to progress and three waves to regress. He simply noted that that was what was happening. Does the essential form have to be five waves and three waves? Think about it and you will realize that this is the minimum requirement for, and therefore the most efficient method of, achieving both fluctuation and progress in linear movement. One wave does not allow fluctuation. The fewest subdivisions to create fluctuation is three waves. Three waves (of unqualified size) in both directions would not allow progress. To progress in one direction despite periods of regress, movements in that direction must be at least five waves, simply to cover more ground than the intervening three waves. While there could be more waves than that, the most efficient form of punctuated progress is 5-3, and nature typically follows the most efficient path.

Good news: You can read the entire online version of the book for free once you become a member of Club EWI, the world's largest Elliott wave educational community.

A Club EWI membership is also free and allows you complimentary access to a treasure trove of Elliott wave resources on financial markets, investing and trading. These resources include videos and articles from Elliott Wave International's analysts.

Hop on the Club EWI bandwagon now 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 U.S. Dollar: Has the Mainstream Been Way Too Confident?. 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.