Next Time You See “4 Times as Many Bulls as There Are Bears,” Remember This
See how stock investors’ “historic optimism” served as a warning
After a 12-year uptrend, just when caution might be in order, investor psychology has remained highly and stubbornly optimistic.
As the July Elliott Wave Financial Forecast, a monthly publication which provides Elliott wave analysis of major U.S. financial markets, said:
Large traders are more exuberant than ever. On June 11, large trader buy-to-open call purchases jumped to 45%, a new record.
A highly bullish outlook was also expressed in this July 10 Marketwatch headline:
The bull market in stocks may last up to five years — here are six reasons why
Notice that the headline’s suggestion is that the bull market has just started.
That five-year forecast might turn out to be correct — but then again, keep this in mind from an earlier 2021 Financial Forecast:
A top never feels like a top. The bigger they are, the more permanent they seem.
And here’s yet another recent look at sentiment via a chart and commentary from the July 14 U.S. Short Term Update, a thrice weekly Elliott Wave International publication which provides near-term analysis of key U.S. financial markets:
The most recent result of the weekly Investors Intelligence Advisors’ Survey (InvestorsIntelligence.com) shows that the percentage of bulls rose to 61.2%. … With the percentage of bears dropping to just 15.3%, there are now four times as many bulls as there are bears. Since the stock market crash of 1987, a span of a Fibonacci 34 years, only 1.5% of the total weekly readings in the II bull/bear ratio have been higher than the 4-to-1 ratio of this past week.
Interestingly, just two days after this analysis published, the Dow Industrials dropped nearly 300 points on Friday (July 16) and on the following Monday, as of this writing, the Dow has tumbled more than 900 points.
To stay independent from the sentiment of the crowd, it’s a good idea to employ Elliott wave analysis and other technical indicators. They will help you stay on track — objectively, independently from the “bullish” news that inevitably fools the crowd.
If you’d like to learn about Elliott wave analysis, or need to brush up on the subject, there’s great news: You can access the online version of Frost & Prechter’s Elliott Wave Principle: Key to Market Behavior — 100% free.
All that’s required for free access to the book is a Club EWI membership. You can join this Elliott wave educational community for free, and membership allows you free access to a wealth of Elliott wave resources on financial markets, investing and trading.
Getting back to the book, here’s a paragraph from the first page of Chapter 1:
In the 1930s, Ralph Nelson Elliott discovered that stock market prices trend and reverse in recognizable patterns. The patterns he discerned are repetitive in form but not necessarily in time or amplitude. Elliott isolated five such patterns, or “waves,” that recur in market price data. He named, defined and illustrated these patterns and their variations. He then described how they link together to form larger versions of themselves, how they in turn link to form the same patterns of the next larger size, and so on, producing a structured progression. He called this phenomenon The Wave Principle.
Get more insights by following this link: Elliott Wave Principle: Key to Market Behavior — free access.
August 21 Update:
Stocks: What to Make of Wall Street’s Sky-High Optimism
“I believe that the market moves in whatever direction hurts the most participants”
The U.S. stock market has been in an uptrend since March 2009 — so, more than 12 years.
To add icing to the cake, there’s this notable factoid (CNBC, August 16):
S&P 500 doubles from its pandemic bottom, marking the fastest bull market rally since WWII
So, after such a historic run, one might think that many Wall Street analysts would say that it’s time to take at least some chips off the table.
Well, not so. Look at this astounding August 14 Bloomberg news item:
Wall Street Is the Most Bullish on Stocks in Almost Two Decades
So, what should one make of this uniformity of thinking and historic bullishness among Wall Street analysts?
Let’s turn to Robert Prechter’s landmark book, The Socionomic Theory of Finance:
Consensus regarding the future course of financial-market prices has an awesome power to become ossified in the wrong direction at markets’ major turning points.
The dictionary defines “ossified” as “having become rigid or fixed in attitude or position.”
That’s the very attitude that prompted Dave Lutz, head of ETFs at JonesTrading Annapolis to say:
“I’m a believer that the market moves in whatever direction hurts the most participants. If all the analysts on the Street are bullish, I’d be very cautious.”
That quote is from the same Bloomberg news item mentioned a moment ago, and Elliott Wave International agrees with that view.
After all, history shows that most investors, including professionals, are “surprised” at major turning points in the stock market.
The same patterns of investor psychology have played out time and again. Elliott waves are a direct reflection of these patterns.
Here’s what’s important to know:
The Wave Principle is governed by man’s social nature, and since he has such a nature, its expression generates forms. As the forms are repetitive, they have predictive value.
That’s a quote from Frost & Prechter’s Wall Street classic, Elliott Wave Principle: Key to Market Behavior.
You can get the details of how the Wave Principle helps investors to forecast the price paths of financial markets by reading the online version of the book — 100% free!
All that’s required for free access is a Club EWI membership, which is also free.
In case you’re unfamiliar with Club EWI, it’s the world largest Elliott wave educational community. Members enjoy complimentary access to a wealth of Elliott wave resources on financial markets, investing and trading.
You can have the book on your computer screen in just a few minutes by following this link: Elliott Wave Principle: Key to Market Behavior — free and unlimited access.