S&P 500: Revealing the "Real" Story About the Record High

 

Financial headlines do not always tell the full story

By Elliott Wave International

Sometimes you have to dig a little deeper than the headline to find out what really happened.

You know, like what's suggested by the television title "True Hollywood Story," or the BBC's "Real Story."

Sometimes getting the real scoop simply satisfies one's curiosity and is more entertainment than anything else. But, at other times, digging deeper into a subject can help one draw an important conclusion that may affect one's life -- or investments.

For example, consider this August 18 Washington Post headline:

U.S. stocks hit record high, ending shortest bear market in history

That headline was referring to the S&P 500 index. Of course, it suggests that a new rip-roaring bull market may be at hand. A new investor might say, "It's time to jump into the market with both feet."

Now, look at this August 22 CNBC headline:

The S&P 500′s return to a record doesn't tell the full story with 60% of stocks still with losses

Ah, this puts a whole new twist on the index returning to a record high. Of course, it suggests that the rally is not "deep," given it's being driven by less than the half of the index's components. That's important information for an investor.

Elliott Wave International's August 21 U.S. Short Term Update, a thrice weekly publication which provides near-term forecasts for major U.S. financial markets, dug even deeper into the behavior of the stock market:

The S&P made a new high today, but the push was attended by negative breadth and negative up/down volume. While the S&P rallied 0.34% today (11.65 points), 56% of the index's issues closed down for the day and just 44% closed up. The new high was attended by Big Board advancing volume of just 33.6% and declining volume of 66.4%. According to SentimenTrader.com, the volume measures were the worst ever for a 0.34% rally dating back to 1962.

Indeed, Elliott Wave International's market experts regularly review more than 100 technical indicators in their analytical work.

As you might imagine, the single most important factor to be considered when making a stock market forecast is the Elliott wave model.

This quote from the book, Elliott Wave Principle: Key to Market Behavior, by Frost & Prechter, provides insight:

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.

[Ralph 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 are interested in learning more about the Elliott wave method of analyzing and forecasting financial markets, know that Elliott Wave International has made the online version of Elliott Wave Principle: Key to Market Behavior, available to you for free.

The only requirement is a Club EWI membership. Club EWI is the world's largest Elliott wave educational community and is free to join. There are no obligations as a Club EWI member.

Start reading the Wall Street classic for free 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 S&P 500: Revealing the "Real" Story About the Record High. 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.

"Powerful Deflationary Winds" Include a "Bust in Commodity Prices"

 

By Elliott Wave International

Elliott Wave International's analysts have posited that the next big global monetary event will be deflation, not inflation.

The writer of an August 18 Telegraph article also sees "powerful deflationary winds."

Here's an excerpt:

Talk of resurgent global inflation is mostly noise. Powerful deflationary winds continue to blow through the world economy. ...

The great inflation hypothesis now in fashion rests on mechanical monetarism. It assumes that the fastest peacetime growth of the "broad" M3 money supply since the American Revolution lays a bed of inflammatory tinder that will catch fire once a match is lit: that is to say, when the velocity of money reverts to mean and collides with the enlarged stock of money.

Liquidity creation has been less extreme elsewhere (the Federal Reserve front-loaded $3 trillion in March and April) but there has still been an eye-watering jump in "narrow" M1 money across the OECD bloc -- ie, a surge in bank deposits due to hoarding of saved money through the lockdowns.

Monetarists say inflation did not take off when QE was first launched a decade ago because the western banking system was crippled. The stimulus offset the destruction of money by banks as they slashed lending in order to beef up capital buffers. This time banks are in better shape (in Europe, really?) and the transmission channel is intact. That at least is the argument.

The monetarist school has claimed victory already, quick to suggest that a V-shaped recovery in asset prices implies a V-shaped recovery in the real economy as well.

The Federal Reserve does not believe a word of it. Nor does the International Monetary Fund, nor the OECD, nor the global professoriate, nor the prophets of modern economic orthodoxy, loosely known as the New Neo-classical Synthesis. Their collective view is that central banks are low on usable ammo and will struggle to create any inflation, unless they escalate to the next stage of Weimar fiscal dominance.

It is now a pitched battle between two incompatible economic models. One side or the other is going to emerge looking bruised, and I suspect that it will be the monetarists. The velocity of money will indeed recover in the long-run but in the long-run -- pace Keynes -- we are all dead.

One thing that is not happening right now is a pre-inflationary surge in raw material prices, let alone an oil shock, though you might think otherwise after the wild moves in gold and silver. The Bloomberg all commodity index has recouped just half of its losses since the pandemic began and remains at near depression levels.

Speaking of raw material prices, Elliott Wave International's monthly publications have been keeping subscribers ahead of the trend.

Here's a chart and commentary from the March 2020 Elliott Wave Financial Forecast:

This chart shows the Thomson Reuters/CoreCommodity Index; the high on the chart is the end of a bear market rally in May 2018. In February 2018, EWFF called for a "substantial decline" in the CRB, and The Elliott Wave Theorist reiterated with a forecast for a resumption of the "Bust in commodity prices" on October 1, 2018. Two days later, the CRB index made the countertrend high shown by the arrow on the chart.

Get more important insights by reading the free report: What You Need to Know Now About Protecting Yourself from Deflation.