Healthcare Is Going To Crash The Market...Or Not

Last week, all the market talk was about what the market was going to do if the healthcare bill failed or passed. And, once again, the market was certain about the outcome. The great belief was that if the healthcare bill passed, the market would rally. If the healthcare bill failed, the market would drop. And, if the healthcare bill was pulled, the market will also drop.

In fact, CNBC provided us with a chart of the common market expectation:

They certainly made it quite easy for all of us, so we don't have to really think for ourselves.

The problem is that the market got it wrong once again. We all know that the healthcare bill was pulled. And, of course, the market dropped. Right?

Well, not exactly. The market has rallied almost 2% since striking a local low at the market open this past Monday.

For those of you that believe the substance of the news drives the market, now is the time to put your blinders on so you don't have to read what I am about to say.

In many of my articles, I have been trying to point out to those open minded enough to listen that the substance of market news does not direct the market direction. The question is how many more examples do you need to before you learn this reality of the market.

I've noted that the problem is that most market participants and analysts view the stock market from a purely mechanical standpoint. The common belief is that if a certain event happens, then there must be a specific stock market reaction to that event. And, as well all know, this firm belief in "exogenous causation" (as termed by Robert Prechter in his latest work "The Socionomic Theory of Finance") is strongly held by almost all market participants.

I've also noted that the problem is that market movement based upon exogenous causation is simply not true if you review market history, rather than hold fast to a commonly held market fallacy.

We have had some resounding real world examples over the last two years to poke some significant holes in the exogenous causation perspective. Remember back to the Charlie Hebdo attack in France, the Fed rate hike in December of 2015, the certain "crash" calls in February 2016, Brexit, Trump, the Fed rate hike in December 2016, etc. We have experienced many news "shocks" which were supposed to cause serious damage to the market over the last several years. Yet, the market was still able to provide us with a 600 point rally up to 2400SPX from February of last year, and this is all AFTER the Fed stopped QE.

Now, we can add the recent healthcare bill to the list of market events that did not exactly turn out as most expected.

As I wrote recently on Seeking Alpha, "Please spare me the convoluted 'logic' that I have heard fundamentalists attempting to espouse to explain the market moving in the exact opposite direction it should have moved. Whenever I read those convoluted explanations, which fly in the face of basic economic theory, it brings to mind an old Ben Franklin quote: 'So convenient a thing it is to be a reasonable creature, since it enables one to find or to make a reason for everything one has a mind to do.'"

You see, investors act in the market through emotional responses, which are the same emotional responses that direct them to herd. And, after they emotionally react, they then attempt to rationalize their actions. Yes, the rationalizations come after the fact. That is why so many attempt to explain non-rational market reactions by claiming "they sold the news." Well, in this case, they bought the news. But, you must begin to recognize that much of what you read is only a rationalization for the market acting emotionally, and often in the opposite manner in which most expect.

And, now, everyone will simply forget about another failure of exogenous causation expectation. Moreover, I am sure they are all now looking for the next news event which will "certainly" build their next exogenous causation expectation. What was Einstein's definition of "insanity?"

If you understand how to track market sentiment, rather than be caught up in it, you would have recognized that our analysis last week suggested that as long as the market held 2320SPX, I was expecting a rally to take hold. This week's low was 2322SPX before we saw an almost 2% rally take hold. Please note that I did not qualify that with what happens to the healthcare bill. Rather, it is simply what the market sentiment patterns were suggesting.

As far as our longer-term projections, we still remain steadfast that the market will rally to the 2500SPX region. As long as we remain over the larger support region I have cited in many past articles (which still can support another drop to just below 2300SPX in the coming month or so), the market is still in a strongly bullish posture, at least until we complete the fractal structure we have been following in almost textbook fashion, which has been pointing to levels over 2500SPX for years. That means that we expect at least one more higher high over 2500SPX, and preferably two, which can take us into late 2017, or even early 2018.

See chart illustrating the wave counts on the S&P 500.

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.