Will The Fundamentals Catch Up To The Market, Or Vice Versa?

I have recently written a few articles discussing my directional perspective on the S&P 500 (SPX). In fact, my long-term target has been 2537-2611SPX for years now. Moreover, before we entered 2016, I noted that I was looking for a rally to 2300 in 2016, but with the market potentially dropping to the 1800 region first into February, as you can see from the chart outlining our analysis for 2016.

But, I also believed that the 2300SPX region was only a way point, as I expected us to head much higher in 2017. To that end, my first larger degree target was in the 2400-2440SPX region. And we have just struck the lower boundary of my target region.

Market Just Not Trading Upon Fundamentals

I have always loved the statement: “The market is just not trading upon fundamentals at this time.” This is the answer so many people have when the market does the “unexpected,” just like the current stock market rally.

In order to accept such premise, one has to believe that fundamentals are supposed to be running the market. But, if they are not, should not one logically be turning to that which runs the market all the time? Is there something one can point towards which can—much more consistently—identify the appropriate directional bias for the market?

You see, even when the fundamentals and news are negative, the market still seems to be able to rally. This shows us that something overrides fundamentals or news. Sometimes market participants care about fundamentals and news and sometimes they do not. That clearly shows that fundamentals and news are not in the driver’s seat, whereas something else is. As I have presented many times, that “something” is market sentiment and we have all seen how it overrides fundamentals.

Consider how many of you were bearish and looking for a stock market crash back in February of 2016, just as we were calling for a “global market melt up?” How many of you were bearish and looking for a stock market crash after Brexit? How many of you were bearish and looking for a stock market crash when Trump won the election? What has kept you on the wrong side of the market during this last 30 percent rally in the stock market over the last year? If you are really interested in making money in the market, I suggest you start doing some personal introspection and be able to answer these questions in a serious manner.

R.N. Elliott provides some eye-opening guidance, and the amazing thing is that he wrote this back in the 1930’s:

“The causes of these cyclical changes seem clearly to have their origin in the immutable natural law that governs all things, including the various moods of human behavior. Causes, therefore, tend to become relatively unimportant in the long term progress of the cycle.  This fundamental law cannot be subverted or set aside by statutes or restrictions. Current news and political developments are of only incidental important, soon forgotten; their presumed influence on market trends is not as weighty as is commonly believed.”

In fact, 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 bearing on fundamental values explains only about one fifth of the movement 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.”

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.”  

Isaac Asimov once said that “Your assumptions are your windows on the world. Scrub them off every once in a while, or the light won't come in.” 

So, maybe it is time for you to scrub your assumptions about how the market works?

Eyeing "Pullback" for Another Buying Opportunity

Back in the middle of February, when we were almost 100 points lower, and many were calling for the market to “top imminently” (as they have been for the last year and 300 point rally), I published an article on Seeking Alpha suggesting that my target for this current rally segment is going to be the 2400-2440SPX region.

As we now find ourselves striking our target of 2400-2440SPX, now is the time to emotionally prepare yourself for a “pullback.”  In fact, based upon the principle of alternation, the potential pullback can be strong and steep. It will likely make most believe the market has begun a “crash,” as so many have been expecting for quite some time. But, it will simply be another buying opportunity, of which I am quite certain most of the market will be too scared to take advantage.

The main floor underneath the market now is at the 2230SPX region.  Support above that resides at 2285-2310SPX.  So, as it stands right now, this would be my target for the next “pullback” in the market before we rally to 2488-2565 next.

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&P 500, metals, oil, USD & VXX), interactive member-analyst forum, and detailed library of Elliott Wave education.