On Friday (Feb. 27), the 4th quarter U.S. GDP was revised downward to 2.2% from the original 2.6%.
“U.S. stock markets shrugged off the revision,” wrote Fox Business. And why wouldn’t they — after all, the conventional wisdom says that as long as the economy is growing, so will the stock market.
Except, it’s not exactly true.
See, if that notion were true, then you’d have to assume that the U.S. economy was in a bad shape in 2007, when the stock market began its biggest decline since the Great Depression. But the facts show the opposite.
When the Dow topped in October 2007, key economic measures were in fact very strong:
In the quarter preceding the market peak, GDP expanded at 2.7%
Unemployment in 2007 was 4.6%
Consumer confidence was very strong, too (top red circle; chart: Bloomberg)
If a strong economy today means a strong stock market going forward, then stocks should have continued higher. They didn’t. The Dow fell more than 50% over the next year and a half:
If you feel that’s counterintuitive, then fast forward to early 2009. That’s when we saw the exact opposite economic picture:
Consumer confidence fell to an all-time low (the second red circle on the blue chart)
GDP growth fell to a negative 5.4%
Unemployment rate more than doubled to almost 10%
Because of such terrible economic data, few mainstream economists were optimistic in early 2009. And yet the stock market bottomed in March of that year.
This reminds me of a quote from our monthly Elliott Wave Theorist:
“Suppose you were to possess perfect knowledge that next quarter’s GDP will be the strongest rising quarter for a span of 15 years, guaranteed.
“Would you buy stocks?
“Had you anticipated precisely this event for 4Q 1987, you would have owned stocks for the biggest stock market crash since 1929.
“GDP was positive every quarter for 20 straight quarters before the 1987 crash — and for 10 quarters thereafter.
Experienced traders say that sometimes, just 2 or 3 good trades make their entire year.
True: If you get in early and ride the trend for a few weeks or months, that may be all you need. That’s why having a perspective on the markets is so important.
That’s also why, our friends at Elliott Wave International, have hand-picked the best clips from their trader-focused “Outlook 2015″ video series to share with you and give you a fresh perspective in 5 key markets: EURUSD, EURJPY, GBPJPY, Crude Oil & Gold
Access this free video series now and get new video forecasts by 4 of EWI’s veteran Pro Service analysts.
Each of the four videos will show you the market’s big Elliott wave picture, give you a forecast for the weeks and months to come — plus several short, punchy, market analysis lessons in Elliott waves/technical analysis you can use again and again.
Crashing oil is all over the news. Mainstream media tells us why the oil fell. And we keep hearing that it will continue to fall. But back in June all we heard was why the oil was destined for new highs. Why is the new so useless?
Because 99% of oil forecasts out there are based on so-called fundamentals. The same “fundamentals” that back in June, when oil cost $107 a barrel, promised even higher prices due to:
The rising threat of Islamic State in Iraq
Weak U.S. dollar and
Strong U.S. job growth
Now that oil has fallen to $54, the same sources are giving you “reasons” why it should fall even more.
You can see what’s happening: Too many analysts simply extrapolate yesterday’s trend into tomorrow.
That’s like saying that because it’s sunny today, expect sun tomorrow, too. That’s not forecasting.
Elliott Wave International prides itself on being bold with its forecasts. They have just released a new report from their in-house Energy expert giving you a unique look at the trend in Crude.
Special Report: “Oil: What’s Next?”
EWI’s Chief Energy Analyst, Steve Craig, has lived the oil market for close to 30 years. In this free report, Steve shares his take on where oil has been — and where it’s going.
As early as 2011, our analysis warned that Europe’s deflation was coming — here’s why
For the economies of Europe, the past few months have felt like one long ice-bucket challenge that never ends: A perpetual state of shock induced by the bone-chilling fact thatdeflation
“…has become a reality in many European countries.” (Oct. 24, New York Times)
At last count, eight European nations are now in outright deflation, including:
Italy’s -0.1% annual inflation, the country’s first descent into deflation since 1959
Spain’s -0.3% annual inflation, the most serious deflation of any larger eurozone economy
France’s near 0.0% core inflation, the lowest in modern history
And no, in case you were wondering, it’s not the warm and fuzzy kind of “good deflation” being touted here in the United States, where the only consequence is lower prices. In Europe, it’s the
“…pretty awful kind.” “Titanic Europe headed for shipwreck” KIND OF awful (Nov.14, The Telegraph)
So, we ask you: What could possibly be scarier than deflation? How about — not even being able to foresee it?
Yes, deflation was a surprise to the financial authorities. Says one Oct. 12 financial blog post:
“It seems the entire world is cooling off in ways most political leaders and central bankers never saw coming. Global finance ministers are now up against a beast none have known in their professional lives.”
That’s what should keep adults like you and me up all night — the “never-saw-it-coming” part. Just how safe is our future if the people whose job it is to keep the world’s economies stable lack the tools to predict one of the most dangerous economic conditions?
This recent lack of foresight jives with what former Federal Reserve chairman Alan “The Maestro” Greenspan said in 2008:
“We can tell a bubble only after it burst.”
It also jives with what some big wig at the Organization for Economic Co-operation & Development said in 2012:
“The responsibility of the ‘latest’ financial crisis, which no one saw coming, should be borne by all of us.”
But the fact is — there was — and is — a way to see these deflationary economic sea changes coming.
This chart of the UK Consumer Price Index is a reliable bellwether for inflation in Europe. You can see that price expansion peaked in September 2011 at 5.2%:
At the time, the “D” word was completely off the mainstream radar. Soaring oil, grain, and commodity prices, alongside a stimulus-happy European Central Bank fueled widespread fears of runaway inflation.
One month before the top, Elliott Wave International’s August 2011European Financial Forecast laid the opposing groundwork:
“We maintain our stance, however, that the looming threat is not inflation but deflation. Far from a sense of relief, the Banks’ paramount feelings should soon develop into an unrelenting dread.”
Here’s what made us take a contrarian stance (among many other reasons):
[In the August 2011 issue,] for instance, we showed a chart of eurozone manufacturing production and British GDP growth. Both were falling, not rising, indicating Europe’s likely return to economic contraction.
[This] chart is another key piece of deflationary evidence… It shows the relentless downward trajectory of Swiss, German and British 10-year bond yields, which is one of the thorniest problems for those who take the inflationist worldview.
Bond yields aren’t just falling: 10-year Swiss, German and British yields collectively dropped to record lows last month. The unrelenting demand for Europe’s safest debt is a smoking howitzer that is blowing the inflationists’ case to pieces.
– The European Financial Forecast, Sept. 2011
However, the widespread call for inflation only continued to intensify in the mainstream finance. In fact, in February 2012, when the U.K. producer price inflation came in higher than expected, it prompted this word of advice from economists:
“PPI: Another wake-up call for apoplithorismosphobes, the clinical term for those who fear deflation. We recommend that sufferers ’seek therapy.‘” (March 12, Wall Street Journal)
Yet, our July 2012 European Financial Forecast remained committed to its counter claim:
“Our models say that inflation rates will keep failing until they’re again measuring the rate of deflation as they last did briefly in 2009.”
So, it’s now 2014 and deflation in Europe is no longer a specter or a figment of an unbalanced imagination. Here’s a comment from the September2014 European Financial Forecast:
“The central bank’s latest deflation-fighting contrivance is a €400 billion package of targeted LTRO loans, which are designed to compel banks to lend to ordinary business owners… The ECB has slashed its main refinancing rate to 0.15% and now charges for banks’ overnight deposits. The result? Shown below, Europe’s largest economy, Germany, just contracted 0.2%; French economic output has ground to a halt; and Italy just entered its third recession since 2008.”
Now that deflation in Europe is a reality, the question is — will it get better? Is this just a temporary economic condition that will be soon replaced with another one — the condition that economists are much more familiar with, inflation?
We don’t think deflation will surrender quite so easily. Want to learn more about deflation before it could potentially affect your investments?
Today, we invite you to read a free report from Elliott Wave International titled, What You Need to Know About Protecting Yourself from Deflation. This 10-page report will help you understand how you can better prepare yourself for its devastating effects.
When the market goes up, or when it goes down, the mainstream media often explains via events or earnings. But very often, the morning headline gets stale by the afternoon on the same day. In the morning it goes something like: XYZ earnings disappoint investors, stocks are crashing! Then by the afternoon they have to change the headline: Investors shrug off bad news. Stocks are soaring! Why does that happen? Is it not that news and earnings move stocks?
Want to Know the REAL Reason Why the Stock Market Turned Down?
The rout in stocks is no “jinx” In case you’ve been roving Mars for the past month, you’ve missed quite a fiasco from the world’s leading stock market:
“Since it topped out last month, the Dow has suffered eight triple digit losses! Add it all up, and the Dow has slid about 7.5% percent from its peak, the biggest retreat in more than two years. It also means the Dow has now given back all of its gains for the year — and then some.” (Daily Finance Oct. 15)
Now, according to the mainstream experts, there are 3 key causes for the market’s sell-off:
On September 19, China’s e-commerce behemoth Alibaba Group launched its $25 billion initial public offering on the New York Stock Exchange — the largest I.P.O. ever in the history of all things, everywhere. An October 13 Bloomberg article calls the BABA reveal a giant, panda-sized sell signal and writes:
“The abundance of investor confidence needed to get Alibaba’s record $25 billion initial public offering off the ground was but one of several red flags that made the market feel top heavy.”
This logic sounds legit now. But back when Alibaba was going to market, the only red flag was the one taunting the wild bulls to charge. From the September 25 USA Today:
“Calling a top based on a big I.P.O. is probably the weakest argument the bears have made so far… While the market isn’t cheap, corporate earnings are still growing solidly, which should keep the bull alive.”
The next reason for the market’s sell-off is…
“A much bigger issue confronting the market is the spread of the Ebola virus. This is by definition, a situation with an unquantifiable outcome and that it would create market uncertainty should hardly be surprising.” (October 13 Bloomberg)
Again, this explanation doesn’t make sense, considering the fact that the Ebola crisis has been front and center in the news since the first outbreak was reported seven months ago — on March 19, 2014. The first 3 American victims of the virus were flown into the United States from Liberia in early August, to receive treatment at the Centers for Disease Control in Atlanta, Georgia.
The third and final impetus for the market’s insidious rout is…
(3) Voodoo Black Magic
Well, sort of. With no tangible trigger for the market’s sell-off, an October 15 news source sites an intangible one:
“It’s not unusual for the market to swing wildly in October… in what’s become known as the ‘Jinx Month.’” (Daily Finance)
Jinx, as in coming from the Greek word “iynx,” bird used in black magic.
At the end of the day, every single one of these efforts to explain the stock market rout occur after the fact – AFTER the Dow has already plummeted over 1000 points from its September 19 peak.
Prior to the market losing its footing, Elliott Wave International published an urgent Elliott Wave Theorist Interim Report. The date of publication: September 19, the day of the high. The report warned investors that the Dow had very good reason to kiss its all-time high goodbye:
“Our daily closing Dow projection of 17,280 was achieved today.”
“Our Flash service is short all three stock indexes.”
“Next week, the U.S. stock averages should decline.”
Once the market began to plummet, our October 10 Short Term Update showed subscribers 2 more objective technical reasons for the reversal.
Reason for reversal # 1:
“It’s now been one full year since October 9, 2013, the date that the Dow’s fifth-wave ending diagonal [Elliott wave pattern] started.”
An Elliott wave ending diagonal pattern is a 5-wave move usually occurring in wave 5. In all cases:
They are found at the termination of larger patterns
The indicate exhaustion of the larger movement
They are followed by a dramatic reversal
Reason for reversal # 2:
“October 9, 2013 marks the start of the trendline that would eventually form the baseline of the diagonal, as shown on the daily chart. The market is signaling that this line is valid and important, as there have been six separate touch points over the past year.
“We’ve often said that trendlines are a meaningful facet of market analysis because we don’t draw them, the market does. All we do is connect the points on the charts to show what the market thinks is significant.
“Today, for the first time in a year, the Dow closed below the trendline, providing another key piece of technical evidence that the wave structure of the prior advance is complete.”
The next chart shows you how the Dow did, indeed, fall below this very important trendline as Short Term Update forecast:
So, to summarize what you’ve just learned:
Fundamental analysis cites Alibaba, Ebola, and/or a magic “Jinx” as the cause(s) for the market sell-off – after the fact.
– VERSUS –
Elliott wave analysis cited an important Fibonacci price target, a mature Elliott wave pattern, and a meaningful trendline as the causes – in advance.
Moving forward, the choice of how you protect your financial future is yours.
It’s times like these when investors like you need to maintain a focus on the coming bear market that will take far too many by surprise. As Bob Prechter says, “bear markets move fast and are intensely emotional; investors and traders who are prepared have greater opportunities on the downside than on the upside.”
In this new report, you’ll read some of the recent analysis Bob Prechter and Chief Market Analyst Steve Hochberg wrote before the late-September turn — and some of what they have written since then.
Are the complacent investors heading for another cliff? Steve Hochberg on the state of retail money market funds vs. stock market capitalization, filmed at the 2014 Las Vegas Money Show
Editor’s note: The article below is adapted from the transcript of the live presentation above, originally recorded at the 2014 Las Vegas Money Show. It features Elliott Wave International Chief Market Analyst Steve Hochberg. Hochberg is co-editor of The Elliott Wave Financial Forecast, one of EWI’s flasgship market letters. Click here for a free excerpt from Hochberg’s latest issue.
This chart is a picture of retail money market funds as a percentage of market capitalization.
In other words, when people are super bullish, they don’t want to hold any money in money market funds. They want to invest it, right?
Because why hold money aside when you don’t think the market’s going down, when it can be in the market if you think it’s going up?
When people are super bearish, what do they do? They take money out of the market, and they put it into money market funds hoping to wait out what they view as a declining market.
Now look at the upward spikes in this chart.
You can see that there was a high percentage of money in money market funds as a percentage of market cap back in 1982 as the market was bottoming and starting that great bull market.
Shortly after the 1987 crash, people got really scared; and again in 2002 after the market had been down 38%, and also in 2009 after the market declined 58%.
We are now at a new all-time low in the percentage of retail money market funds relative of market cap at just 2.8%. In other words, people are fully invested.
Investors are so optimistic about the future, they see no reason to keep money in money market funds in case the market goes down.
This is a classic warning sign that a reversal is ahead. Have you made your logistic plans to pull out of the market on time? Remember: Stocks decline first, economic recession becomes apparent 6 months later which is usually too late to save your nest egg.
The Elliott Wave Financial Forecast warns that the contracting U.S. economy signals deflation ahead
In June, the U.S. government, revising its previous number, reported that the economy shrank by 2.9% in the first quarter of 2014.
The steep plunge caught the bulls by surprise.
It was substantially worse than the preliminary forecast
for a 1.0% contraction, which itself was a far cry from the
initial 0.1% growth forecast in April.
As you can see on this chart, the last time the economy shrank was Q1 of 2011 (a 1.3% dip).
The [2.9%] decline was the sharpest since growth tumbled 5.4% in the first quarter of 2009 during the Great Recession. It was also one of the worst falloffs outside of a recession since 1960.
USAToday, June 25
The Elliott Wave Financial Forecast, the monthly
report issued by Elliott Wave International, the world’s largest
financial forecasting firm, which is well-known for calling
into question many mainstream forecasting methods, holds a
drastically different outlook from the government. If you
too don’t trust the government projections, EWI is a good
source of contrarian-minded research and analysis.
Financial Forecast co-editors Steve Hochberg and
Peter Kendall warn that investors are dangerously discounting
the potential for a market selloff. They say the economy is
slowly contracting and winding its way toward outright deflation,
and the recent government revision is evidence of deflation
in action. In their recent issues of the Financial Forecast,
they have documented more than two dozen measures of extreme
investor optimism, a classic reversal indicator for technical
After the government’s Q1 revision, the stock market hovered in positive territory. What’s more, the Consumer Confidence Index registered a six-year high.
But Hochberg and Kendall believe, in spite of all the optimism, that this latest revision should raise concerning questions among investors about the sustainability of today’s exuberant psychology — especially now that economic growth is inconsistent with the prevailing psychology. When so many sentiment indicators align in one direction, it’s a good time to check in on what the opposite side of the trend might look like. After all, markets never go in the same direction forever, and they tend to reverse alongside extremes in sentiment. Investors who are aware of and prepare for such turning points dramatically increase their chances of surviving them.
Click here for specific forecasts and analysis from Hochberg and Kendall’s latest, July Financial Forecast. You will get free access to a big chunk from their latest issue, complete with labeled technical charts.
There are financial parallels between the 1920s and today - is history set to repeat?
When the financial media mentions the late 1920s, they usually mean the 1929 stock market top and the market crash that followed. But today’s investors can also learn from what happened in 1928. That was the year that the bond market topped, while commodities peaked even earlier.
You can see this for yourself in a chart published in the September 2013 issue of Robert Prechter’s Elliott Wave Theorist.
In the deflationary crash of 1929-32, commodities fell from lower peaks, not higher peaks; stocks fell from all-time highs down to the bottom; and bond prices fell from an all-time high a year earlier.
The Elliott Wave Theorist, July-August, 2013
These markets could see a similar outcome in the near future: Commodities peaked in 2008, while Treasury bonds topped in 2012. The high in the Dow Industrials remains December 31, 2013.
Of course, history doesn’t always repeat itself. Whether December 31 proves to be a long-term high in the Dow remains to be seen. The stock market rally since March 2009 has been doggedly persistent. Prices have surged several times just as the indicators suggested the uptrend was over.
Bad Start for Stocks in 2014: Buying opportunity or more pain to come?
You can benefit greatly from looking at charts that take a historical look at what’s going on in the financial markets. Robert Prechter has just released an issue of his Elliott Wave Theorist publication that includes 15 charts of the S&P 500, NASDAQ, gold, and mutual funds — along with his analysis.
With this information, his Elliott Wave Theorist subscribers are now prepared for 2014. And you can be, too, because you can get the full issue, FREE.
The Federal Reserve’s efforts to rescue the economy have been historically aggressive, starting with the initial round of quantitative easing in 2008 and continuing through 2013. Much money has been printed, despite what Bernanke says. M1 has been more than tripled. Yet Gold is down, commodities market is down, and inflation is still at historic low levels!
The central bank’s assets have skyrocketed due to the Fed’s bond purchases, which you can see clearly in this eye-opening report that Robert Prechter presented to the Market Technicians Association and his Elliott Wave Theorist subscribers.
The main reason investors are expecting runaway inflation is illustrated in [the chart above], which shows the value of assets held at the Federal Reserve. The Fed has been inflating the supply of dollars at a stunning 33% annual rate over the past five years. … [N]o wonder investors expect inflation and have aggressively positioned for it.
Look just about anywhere else, however, and you will see subtle evidence of deflationary pressures. Given knowledge only of the Fed’s inflating, many people would expect the Producer and Consumer Price Indexes to be rising at a rate of 33% annually. But, as you can see in Figure 2, the PPI’s annual rate of change is stuck at zero and the CPI has been rising at only a 2% rate.
The Elliott Wave Theorist, July-August, 2013
In an interview at the recent San Francisco Money Show with financial author Jim Mosquera, EWI’s Chief Market Analyst Steven Hochberg explains why the Fed has gotten so little in return from its stimulus programs. Here’s a brief excerpt from the interview published on Aug. 18:
Question: The Fed wizards have been pushing buttons and pulling levers rather furiously since 2008. The discount rate is rock bottom, and the Fed balance sheet has swelled to the tune of trillions. What button is left for them to push?
Steve Hochberg: That is a really interesting question the way you phrased it because the fact that they have been pushing buttons and have gotten very little in return tells us … that the Fed is not in control. The Fed does not control the markets, and it doesn’t control the economy. Both are bigger than the Fed.
You say they have been doing this furiously. They have been doing this historically! Yet if you look at inflationary measures, such as the Personal Consumption Expenditures, which is the Fed’s favorite way of measuring inflation, it’s bumping along at 1%.
We have had historic fiscal and monetary stimulus and yet no inflation. Why? The forces of deflation are overwhelming the forces of inflation. The Fed dropped interest rates in 2000 to 2002 and that did not stop the Nasdaq from dropping 78%. The Fed dropped rates from 2007 to 2009 and it did not stop the Dow from going down 59%. There is historical evidence that the Fed does not control the markets but that the markets control the Fed.
As the next leg of the bear market starts unfolding, they are going to do more unconventional things. Things will accelerate to the downside when the public realizes the central banks aren’t in control.
How to Protect Your Money When the U.S. Debt Bill Comes Due
Read this new FREE report from Robert Prechter
The Federal Reserve has been inflating the supply of dollars at a stunning 33% annual rate over the past five years. You don’t want to be unprepared when that bill comes due! Read this free report from Robert Prechter, market forecaster and a leading opponent of the Federal Reserve, and learn how you can protect yourself. As a result, you will understand today’s biggest risks to stocks, commodities, precious metals and the economy — risks that most mainstream sources cannot see because they’re blinded by decades of inflationary Fed policy.
Gold is down despite the printing press! Commodities are down! Peak OIL is not the topic anymore. Home prices have moved up with record low cost of lending and tremendous FED help. Stock market defied gravity in 2013 and is holding up so far. But how far can it go? Is the turn near once again? The financial community always wonders the answer to such question but there is no crystal ball. Though technical analysis may help us understand the landscape so that we may adjust our expectations. So what is the landscape like today? I may not be Santa Claus, but I have an early present for you this year. It’s 15 charts of financial markets with analysis by Robert Prechter, the president of Elliott Wave International.
He created these charts – which cover markets like the S&P 500, NASDAQ, gold, and mutual funds – to explain where financial markets have been and where they are headed. These are not your typical price charts. They combine history and patterns to tell the story clearly, all from his distinctly different point of view. With this information, his Elliott Wave Theorist subscribers are now prepared for 2014. And you can be, too, because you can get the full 10-page issue, for free.
Elliott Wave International hasn’t offered a free issue from Bob in quite some time, but they feel that the message of this issue is extremely important and can provide you with an outlook for 2014 that you shouldn’t miss.
Prechter says that “charts speak the truth.” Here is your chance to see what truths these charts are telling. If a picture is worth a thousand words, then this publication is like reading more than 15,000 words of his market analysis.
Pointer: Be sure to check out one of the interesting charts, which shows how Main Street investors actually see the markets better than Wall Street.