This Past Week Was More Important Than You May Understand

March 30, 2020
Elliot Wave Technical Analyst & author @ Elliott Wave Trader

On Thursday, we saw the worst jobless claims number in history (and by far). Yet, the S&P500 futures rallied over 200 points from their overnight lows. So, are we to believe that the “cause” of that rally was the jobless claims?

I can assure you that if the market dropped 200 points there would be no question in your mind that the drop was certainly caused by the jobless claim’s announcement. In fact, there is not a single one of you reading this that would have even doubted that as a “fact.” If we are going to be honest here, it is likely that all of you probably had the expectation that the market going to be down big when those numbers were announced.

So, in the interest of intellectual honesty, should we not view the 200+ point market rally, which began immediately after the claim’s announcement, as being "caused" by the jobless claim’s news? That would be the logical conclusion, right? How can you even doubt this as a “fact” if you would have believed a market drop of 200 points was caused by this report?

Consider why the market drop scenario would have been so certain to you whereas the market rally scenario makes you stop and think. The move occurred right after the announcement, so why would you question it? Isn’t that how the market works? What is the problem you are having in accepting this?

If you consider these questions in an honest manner, you may be on your way to enlightenment about our financial markets.

Yet, I am quite certain that some of you will ignore the obvious facts, begin to engage in mental gymnastics, and claim that the market rallied because it expected worse numbers, or try to come up with some other ridiculous “reason.” While you can try and spin this as much as you want, there is no reasonable explanation as to why the stock market would rally over 200 points on the worst jobs report we have ever seen, especially with most people expecting the next one to be even worse. So, at least be honest with yourself.

If you do not come to the conclusion that the substance of a news event is completely meaningless to the direction of the market movement after what you saw this past week, then there is simply no hope for you. Either you believe what your eyes are telling you, or you will simply continue down a path paved with market fallacies while wearing your blinders. At some point, I hope many of you eventually wake up and recognize the reality of what drives the market.

(I am not even going to discuss the fact that the S&P500 ended down almost 100 points after Congress finally passed the stimulus bill).

The main problem many of you have is that you assume that the market will act “reasonably.” But, that is simply not the case. You see, markets are not driven based upon reason. Rather, they are driven based upon emotion. And, trying to ascertain the direction of an emotional market using reason is like trying to reason with your spouse when they are acting emotionally. How well does that work for you?

I have tried to explain this time and again. News simply provides us an excuse for a move in the market which was already set up to happen, whereas the substance of that news is not going to always be predictive as to the direction of the market move. And, when there is no news, pundits struggle to find a reason.

This past week, we saw a 200-point rally early in the week on no news (Tuesday), followed by a 200-point rally on news which had most expecting a 200-point decline (Thursday on jobless claims), followed by a 100-point decline on news which most would have expected a 100 point rally (Congress passes stimulus bill).

If you were really paying attention, this past week has obliterated any “reasonable” expectations based upon news events.

Yet, over the years, I have cited many independent social experiments and historical analysis which prove that news is not the driving force in markets, despite the common fallacious expectations to the contrary.

In a 1988 study conducted by Cutler, Poterba, and Summers entitled “What Moves Stock Prices,” they reviewed stock market price action after major economic or other type of news (including major political events) in order to develop a model through which one would be able to predict market moves RETROSPECTIVELY. Yes, you heard me right. They were not even at the stage yet of developing a prospective prediction model.

However, the study concluded that “[m]acroeconomic news . . . explains only about one fifth of the movements in stock market prices.” In fact, they even noted that “many of the largest market movements in recent years have occurred on days when there were no major news events.” They also concluded that “[t]here is surprisingly small effect [from] big news [of] political developments . . . and international events.” They also suggest that:

The relatively small market responses to such news, along with evidence that large market moves often occur on days without any identifiable major news releases casts doubt on the view that stock price movements are fully explicable by news. . .

In August 1998, the Atlanta Journal-Constitution published an article by Tom Walker, who conducted his own study of 42 years’ worth of “surprise” news events and the stock market’s corresponding reactions. His conclusion, which will be surprising to most, was that it was exceptionally difficult to identify a connection between market trading and dramatic surprise news. Based upon Walker's study and conclusions, even if you had the news beforehand, you would still not be able to determine the direction of the market only based upon such news.

In 2008, another study was conducted, in which they reviewed more than 90,000 news items relevant to hundreds of stocks over a two-year period. They concluded that large movements in the stocks were NOT linked to any news items:

Most such jumps weren’t directly associated with any news at all, and most news items didn’t cause any jumps.

In a paper entitled “Large Financial Crashes,” published in 1997 in Physica A., a publication of the European Physical Society, the authors, within their conclusions, present a nice summation for the overall herding phenomena within financial markets:

Stock markets are fascinating structures with analogies to what is arguably the most complex dynamical system found in natural sciences, i.e., the human mind. Instead of the usual interpretation of the Efficient Market Hypothesis in which traders extract and incorporate consciously (by their action) all information contained in market prices, we propose that the market as a whole can exhibit an “emergent” behavior not shared by any of its constituents. In other words, we have in mind the process of the emergence of intelligent behavior at a macroscopic scale that individuals at the microscopic scales have no idea of. This process has been discussed in biology for instance in the animal populations such as ant colonies or in connection with the emergence of consciousness.

In 1997, the Europhysics Letters published a study conducted by Caldarelli, Marsili and Zhang, in which subjects simulated trading currencies, however, there were no exogenous factors that were involved in potentially affecting the trading pattern. Their specific goal was to observe financial market psychology “in the absence of external factors.”

One of the noted findings was that the trading behavior of the participants were “very similar to that observed in the real economy,“ wherein the price distributions were based on Phi.

And, when the market rallied over 200 points on Tuesday without any accompanying news, we experienced yet another example of what these studies prove. Moreover, our members were expecting this move and we really did not need any news to maintain such an expectation:

"I literally had the best day of trading to date today with positions I opened yesterday afternoon and then this morning based on your analysis." (averagedown)

“Based on [Avi's] analysis and using stocks identified on Stock Waves, the positions I opened yesterday were up an average of 33 percent. Without Pinball and Stock Waves, I would not have had the confidence to make those trades. Bravo to the Pinball Wizard!” (Steveandzoom)

“If the news is the major driver of the market, then Avi must have tomorrow’s newspaper at hand.” (lucidwonk)

At some point, you must begin to recognize that markets are driven by market sentiment. And, the parameters that the market is providing to us right now based upon our sentiment analysis suggests that as long as we remain below 2725SPX, we can expect a lower low before the next major bull market move begins. But, the larger degree structures still suggest that the SPX can be heading to the 4000 region in the coming 3 years. I have seen nothing yet to suggest otherwise.

For those that have been following my analysis for the last several years, you would know that I was pounding the table to the long side in early 2016, calling for a “global melt up.” You would also know that in late 2018, I raised cash when the market broke down below the 2900SPX region, and then outlined a TLT long trade in November of 2018. Those that followed me had a tremendous opportunity to earn 30%+ in the TLT trade I outlined back in late 2018, and then cashed it in.

Then, when the market broke out to levels over 3040SPX in late 2019 and into early 2020, I was very cautious about being long the equity market until the market proved to me its ability to hold support on the pullback I was expecting in the first quarter of 2020. Clearly, it did not, and many of the members of ElliottWaveTrader.net have been thanking me for keeping them safe from the market carnage most others experienced over the last 6 weeks. In fact, those who followed me in shorting EEM have done even better.

Therefore, those that have followed my lead have a cash reserve from a TLT trade to deploy into the market at amazing bargain prices. So, while many of you may have derided my cautious stance earlier this year (at least until the market tipped its hand by the end of the first quarter of 2020), those that followed my analysis have placed themselves in a superior investment posture today.

So, as many analysts and investors may be telling you that you need to prepare for this “bear market,” I am suggesting that you should keep an open mind for the resumption of the bull market move. In fact, our StockWaves analysts provided our members with a list of stocks, with many of them rallying 20-45% over this past week.

So, consider putting together your shopping list over the coming weeks, as the market is having a fire sale. And, until I see something within the market structure to make me think otherwise, this is going to my plan over the coming weeks and months. Ultimately, it will take a sustained break down below 1990SPX to make me reconsider my larger degree expectations, with 2060 being my ideal level of support for one more bout of weakness. The market has drawn the lines in the sand as far as I am concerned.

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Avi Gilburt is a widely followed Elliott Wave technical analyst and author of ElliottWaveTrader.net, a live Trading Room featuring his intraday market analysis (including emini S&P500, metals, oil, USD & VXX), interactive member-analyst forum, and detailed library of Elliott Wave education. You can contact Avi at: info@elliottwavetrader.net.

Due primarily to the California Gold Rush, San Francisco’s population exploded from 1,000 to 100,000 in only two years.

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