When Even Bears Act Bullishly (What It May Mean)

"Some indicators are making records"

By Elliott Wave International

It's difficult for most investors to take an independent stand from the crowd.

For example, it may be wise to "buy when there's blood in the streets," as Baron Rothschild famously said, but for many investors, that's easier said than done.

Likewise, when a financial uptrend has persisted, it's difficult for many investors to act in a contrary way to the pervasive optimism.

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

The chart shows the exposure to equities held by members of the National Association of Active Investment Managers. Readings above 100 mean that managers are leveraged long equities [and] this week's reading [is] 107.99%. ... Some indicators are making records. The bottom graph on the chart shows the equity exposure of the most bearish fund managers. Yes, even the bears are bullish. For the past three weeks, the most bearish fund managers were still net-long stocks by 50%, 65% and 50%. It's the first time in the history of the data ... that bearish fund managers have been net-long equities 50% or more for three consecutive weeks.

Here are three headlines which speak to the persistent bullish sentiment:

• Stocks Are Still the Place to Be, Our Exclusive Big Money Poll Finds (Barron's, Oct. 16)
• Invesco records fifth straight quarter of net inflows (Pensions & Investments, Oct. 26)
• Fund managers make their biggest bets on U.S. stocks in 8 years ... (Marketwatch, Nov. 16)

The takeaway is that when almost everyone acts bullishly, even the most bearish, there's relatively few investors left to buy to keep an uptrend going.

This doesn't mean that the financial uptrend will stop, say, tomorrow or the next day.

However, it does suggest that an investor will want to pay particularly close attention to the message of the Elliott wave model, which offers high-confidence insights into market turn junctures.

Indeed, here's a quote from Frost & Prechter's Wall Street classic, Elliott Wave Principle: Key to Market Behavior:

When after a while the apparent jumble gels into a clear picture, the probability that a turning point is at hand can suddenly and excitingly rise to nearly 100%. 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 can gain insights into the recurring price patterns of the stock market by reading the entire online version of the book -- 100% 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.

Club EWI members are granted free access to a wealth of Elliott wave resources on financial markets, investing and trading.

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

How to Outwit 99% of Investment Pros

Was COVID-19 a "bullish event"? No. Here's the real answer why stocks rose as the pandemic raged.

By Elliott Wave International

Waves of social mood fluctuate in accordance with the Wave Principle and determine prices in financial markets.

Moreover, these same waves regulate the tenor and character of social attitudes and actions.

The key point is that social mood is the cause. It is endogenous. Prices in financial markets and events in society are the effects. They are exogenous.

However, most people believe the opposite is true.

For example: Most people believe that recessions cause business people to be more cautious. However, Elliott Wave International posits that cautious business people cause recessions.

Or, consider the widespread notion that scandals make people outraged. In truth, outraged people seek out scandal. Consider that when mood is positive, fodder for scandal is often dismissed.

You can also flip around the notion that nuclear bomb testing makes people nervous and say that nervous people test nuclear bombs.

Here's another example: Many observers believe that a rising stock market makes investors increasingly optimistic. However, the evidence suggests that optimistic investors cause stock market prices to rise (and pessimistic investors cause market prices to fall).

Elliott Wave International's Asian-Pacific analyst, Mark Galasiewski, drove the point home further when he said this at the Chartered Market Technician Association's Asia-Pacific Summit in October:

If you were able to make that one counterintuitive leap that the same endogenous mass psychological swings that create patterns in the stock market also drive other headline social events, then you have already won half the battle in the market and you understand stock market movements better than 99% of industry professionals.

Social mood swings from extreme optimism to extreme pessimism and back again.

By the time that these social mood trends show up as major news or events (positive or negative), that's when the pendulum is set to start swinging in the other direction.

Recessions, scandals, nuclear testing and so on were mentioned as examples of what may occur during negative mood trends.

Let's add epidemics to that list. Yes, Elliott Wave International has observed a relationship between bear markets and infectious disease.

Using this knowledge, the April 3, 2020 Global Market Perspective, a monthly Elliott Wave International publication which covers 50+ worldwide financial markets, said:

Asian-Pacific and emerging market stocks began bull markets amid the SARS epidemic of 2003 and the Swine Flu epidemic of 2009. They should similarly embark on a bull market amid the Covid-19 pandemic of 2020.

Indeed, look at this MSCI Emerging Markets Index chart which Mark Galasiewski showed at that Asia-Pacific Summit previously mentioned:

As you can see, an uptrend did ensue amid Covid-19.

However, it would be wrong to say that epidemics are bullish for the stock market. That's that "exogenous" thinking trap which was discussed above. A proper way to think about it is that when social mood is at its lowest, epidemics are more likely. That's why they have so often marked a bottom, not a top. As Mark said:

Notice that these three major infectious diseases spread widely toward the end of major bear markets.

This is invaluable information for any investor. Imagine having this knowledge back in March 2020, when the first wave of the pandemic hit and everyone panicked!

If you would like to dig deeper into the "endogenous patterns" of the Wave Principle, 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.

Get insights into the "predictive value" of the Wave Principle by reading the online version of the book -- entirely free!

The only requirement 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 are under no obligations. Yet, members do enjoy complimentary access to a wealth of Elliott wave resources on financial markets, investing and trading.

Follow this link 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 How to Outwit 99% of Investment Pros. 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.