If I had asked this question in January, almost all of you would have answered this question with 7000SPX, as almost all analysts and investors were certain that the market was heading to that target this year.
To say that the market was uber-bullish early in the year is likely an understatement. As I run a market analysis service for about 9000 members, there are a lot of things that are discussed and cited in our trading rooms. For example, this was noted by one of our members as we were at the highs early this year:
“I was just watching financial news [I know... worst thing I could do.] The commentator was discussing the number of analysts on Wall Street declaring the 60:40 portfolio is dead. Forget about bonds, gold and cash. Investors should be 100% stocks... and tech stocks should be the majority of that. Those of us who have been around for more than a minute have heard this before.”
That certainly sounds like quite a wildly bullish perspective on our market being held by Wall Street analysts early this year, does it not? In fact, almost all analysts at the time viewed 7000SPX as “in the bag” for 2025. And, the average investor was of the same mind, as I was seeing many comments like the following in public articles:
“we will NEVER see 4100 again”
“Better chance at 8k than 4K at end of 2025”
And, if you believe that the majority of analysts would normally be better than the majority of investors, well, think again. The following comes from Daniel Crosby’s The Behavioral Investor:
“[C]ontrarian investor David Dreman found that most (59%) of Wall Street consensus forecasts miss their targets by gaps so large as to make the results unusable – either undershooting or overshooting the actual number by more than 15%. Further analysis by Dreman found that from 1973-1993, the nearly 80,000 estimates he looked at had a mere 1 in 170 chance of being within 5% of the actual number.
James Montier sheds some light on the difficulty of forecasting in his “Little Book of Behavioral Investing.” In 2000, the average target price of stocks was 37% above market price and they ended up 16%. In 2008, the average forecast was a 28% increase and the market fell 40%. Between 2000 and 2008, analysts failed to even get the direction right in four out of the nine years.
Finally, Michael Sandretto of Harvard and Sudhir Milkrishnamurthi of MIT looked at the one-year forecasts of 1000 companies covered most widely by analysts. They found that analysts were consistently inconsistent, missing the market by an annual rate of 31.3% on average.”
In 1996, Robert Olson published a study in the Financial Analysts Journal in which he studied the effects of herding upon “expert” fundamental analysts’ predictions of corporate earnings. After studying 4000 corporate earnings estimates, he arrived at the following conclusion:
“Experts’ earnings predictions exhibit positive bias and disappointing accuracy. These shortcomings are usually attributed to some combination of incomplete knowledge, incompetence, and/or misrepresentation.”
But, very few people have the ability to understand the broader market context, so they often get caught herding at the major market turns. At the end of last year, it was relatively clear to only a minority of analysts and investors that the market was overdue for a pullback. In fact, I was noting to my clients in the last quarter of 2024 that I raised a significant amount of cash. And, as I have received thousands of “thank you” notes from our clients through the years, of late they have been coming in quite steadily again, almost all saying the same thing as this member:
“This service has not only made me money in trades but equally important it got me out of the market before the meltdown and conservatively saved me $1.5MM in what would have been "paper" losses.”
Unfortunately, too many investors follow the news for their cues regarding the market. And, often, that is too late for them to do anything about it. Unfortunately, most of them do not realize that news-following is an unreliable way to approach the market.
You see, while many of you are so certain the news causes moves in the market, you do not realize that this is based upon a very superficial perspective of the market. While there are times that negative news will accompany a market decline, or positive news will accompany a market rally, most will simply ignore the many times when markets rally on bad news or fall on good news. Or, sometimes the market does not even react at all to something they would otherwise have thought to be “important.”
Rather, I view news as being more in the nature of a catalyst to ignite a market move which has been already set up. So, in my world view, the announcement ignites a market move that was already set up and the substance of the news is really somewhat immaterial.
I remember when I was a keynote speaker at a recent MoneyShow conference, and someone asked me what my thoughts would be about the market if the Ukraine/Russia war concluded. Well, since I was trained as an attorney, I answered him with my own question. I asked him if he remembers what happened on the exact day that Russia invaded Ukraine? He answered me by putting his thumb in the air facing down. I then asked him if he would be surprised if I told him that the exact day that Russia invaded Ukraine the market began a 15% rally? And, he did not have to answer me as I saw the shock in his face.
One of my clients wrote about this in our trading room recently:
“Prior to finding Avi I would attempt to trade and learn about the markets be reading articles on seeking alpha and following the news. Luckily I only did this for a few months. But during that time, articles and news would say the market went up or down because of X. But then when X would happen and the market didn’t go up or down, but did nothing or the opposite, they would write that it must have been “priced in.”
To me it was obvious that this cannot be correct. You can’t have it both ways! I felt like Mugatu in the movie Zoolander when he says, “Doesn’t anyone else notice this?! I feel like I’m taking crazy pills!”
Thus, it was easy *for me* based on that background to accept that the news doesn’t matter and the markets reflect sentiment. Perhaps others come to EWT with not quite the same background so it is harder for them to “make the jump.” I rarely share this story with these specific details, but I thought it might be helpful to some of those who are still tempted to believe that the news causes anything in the markets.”
Another one of our clients recently wrote the following:
“Elliott Wave Trader has shown me again and again, in real time, how news doesn’t drive the markets. Investor sentiment drives the markets, and even if you get the news right, you can get the reaction wrong. My returns have been significantly higher since I joined and discovered sentiment is the important piece of the puzzle, not the news itself.”
And, I can sit here and fill at least another 10 pages with similar real-life examples of how markets have moved in the exact opposite manner based upon the substance of a news event. But, if you won’t take my word on the matter, well, how about some actual studies about markets and news?
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.”
And, there are many more similar studies. Yet, simply because people saw the market drop when some of the tariff news was announced, or it rallied when positive news was announced, everyone is certain that the market is being driven by the tariff news today. And, there is nothing you can say to them that will dissuade them of this notion.
Well, again, being an attorney, I pose to them the following question: How do you explain the recent market rally of almost 1% after an announcement by the Chinese government that they are not going to negotiate with the US? Should that not have “caused” a multi-hundred-point SPX decline based upon the common theory and expectation? Or, did this “cause” the 1% rally? If you shrug this off, then you are simply not being honest in your market view.
As I have noted many times before, Bob Prechter, in his seminal book The Socionomic Theory of Finance (a book I highly recommend to each and every investor), said it best:
“Observers’ job, as they see it, is simply to identify which external events caused whatever price changes occur. When news seems to coincide sensibly with market movement, they presume a causal relationship. When news doesn’t fit, they attempt to devise a cause-and-effect structure to make it fit. When they cannot even devise a plausible way to twist the news into justifying market action, they chalk up the market moves to “psychology,” which means that, despite a plethora of news and numerous inventive ways to interpret it, their imaginations aren’t prodigious enough to concoct a credible causal story.
Most of the time it is easy for observers to believe in news causality. Financial markets fluctuate constantly, and news comes out constantly, and sometimes the two elements coincide well enough to reinforce commentators’ mental bias towards mechanical cause and effect. When news and the market fail to coincide, they shrug and disregard the inconsistency. Those operating under the mechanics paradigm in finance never seem to see or care that these glaring anomalies exist.”
So, let’s go back to the original question as to whether the market is going to still rally to 7000SPX? Well, there is strong potential that the SPX has begun a multi-year bear market, with my next downside target being 3500-3800SPX. In fact, there are many individual stocks that have already confirmed their multi-year bear market. But, there is still a reasonable probability that the SPX can still head north of 6200SPX before it begins its multi-year (and potentially even multi-decade) bear market. And, the action we see over the coming weeks and months will either confirm that new highs are coming before that bear market begins in earnest or if we have already begun that long-term bear market.
While I am not going to delve into the technical analysis in this public article as to how to recognize that this long-term bear market has indeed begun, I will simply note that if we break down below the recent market lows, this makes it a high probability that we have begun a very long-term bear market. While we will still see a number of multi-year bull-trending markets, they will likely only be corrective rallies making lower highs, providing opportunities to raise cash for the more astute investors.
Do you understand the overall market context enough to make you an astute investor?
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