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U.S. Markets: The BIG story everyone missed in 2016 and what it means for you now

by Alexandra Lienhard
Updated: February 14, 2017

In this interview with ElliottWaveTV, our Chief Market Analyst, Steve Hochberg, tells you about the key story from 2016 that most investors missed, discusses the "Trump Bump" -- and explains what he's watching closely right now. You'll see what a critical market juncture we're in and learn what to expect from stocks next.


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[Editor's note: The text version of the video is below.]

Alexandra Lienhard: Today on ElliottWaveTV, I'm joined by Steve Hochberg, Elliott Wave International's Chief Market Analyst and the Editor of EWI's Elliott Wave Financial Forecast. Now, Steve, generally speaking, the Trump bounce seems to have catalyzed equities and risk. Do you agree? And did anyone see that coming?

Steve Hochberg: Well, not surprising. I don't agree with a lot of the narratives that are out there right now, which is that the market's rallying because of Donald Trump. And when you look at the internals of what was going on leading up to the election and then the rally, you can see it doesn't make logical sense. For example, the market, the Dow was in a consolidation pulling back a little bit from about mid-August to early November. And it made its low, the end of the consolidation, on November 4th, which was the Friday before the election. Remember, the election was Tuesday the 8th. So the market started rallying on that Monday. Now going into that weekend, Hillary Clinton was ahead in all the polls, and she was a consensus person to win the presidential election. Markets started rallying very strongly on Monday, when she was still ahead in the polls. And even on Tuesday, the market was up pretty strongly. It wasn't until midnight on Tuesday that it looked like Donald Trump might pull out the election. So here you have a market that's rallying in anticipation of a Clinton win for the presidency, and it continued to rally when Trump won. So I think the much more logical explanation is the rally really had nothing to do with the presidential election. I think the more logical answer is that it was just time to rally. The pullback was over. The pattern, the Elliott wave patterns that we follow suggest that we start moving to the upside. And that's exactly what happened, regardless of who was winning the election.

AL: Fair point. Now, can you tell us more about this pattern, not only in terms of its longer term implications, but where the market currently stands within this pattern?

SH: Yeah, and that's the stuff that we're really excited about here at Elliott Wave International, because the pattern itself is pretty straightforward and clear. And when a pattern is clear, an analyst can have a pretty high confident opinion about the probabilities in the future. So what we're looking at in terms of Elliott waves, or our analysis, is an impulse pattern, a five-wave rally, at various degrees of trend. One degree of trend, it started in February of last year, about 15,500 in the Dow. And that rally that started that low should trace out just a normal, regular, five-wave rally pattern. We're in the middle of that rally right now, in the process of rallying to complete the latter stages of it. It's not done quite yet, which implies that we're going to have a little bit more to go on the upside. And it won't be as smooth of a rally going forward, because we've completed the strongest portion of it. But it's not done yet. And so, because it's a five-wave impulse pattern, it should give us a pretty good idea of when it's going to end. And we should have a strong basis for calling the end of it. So that's what we're looking at going forward.

AL: So, Steve, fair to say you're constructive on the US stock market for a quarter or two, but it's really just the calm before the storm. Is that a fair assessment?

SH: Yeah, it's pretty fair. I would say that we're constructive on the market, as long as the Elliott wave structure is not complete. It might be a month, a quarter. It might be half a year. But once this five-wave rally from February finishes and terminates, that's going to complete a larger bull market that you can date back, in many respects, to the lows in March of 2009, and even all the way back to the low back in 1932. So what's coming is probably the greatest bear market that our generation will ever see, but we're not there yet. And we're going to be following and tracking the final waves as they unfold up into the peak in the market.

AL: Thanks, Steve. Now, last question for you. I can't let you go without talking about arguably the key story from last year, what may be the story this year. And that's rates. So bottom line, let's cut to the chase. In 10-year yields, the low was at near 130 in July 2016. In your view, is that a low or the low? And beyond that, where is the pattern and positioning in your view?

SH: Yeah, let's think back to the bond market. I mean, you have to go all the way back to 1981. Remember when the 10-year treasury was yielding above 15%? I think it was about 15.8% in the fall of 1981. And that really started that, this long term 35-year bull market. In our estimation, and we actually put out a combined special report between the Elliott Wave Theorist and the Elliott Wave Financial Forecast pointing out the end of this long bull market. I think that low in July of 2016 was the end of the bull market. We've made a turn to the upside in rates. 10 years -- bonds don't always trace out the greatest Elliott waves, simply because a bond interest is simply the rent on money. But this particular wave that we're following, from the low in July 2016, is pretty clear. So I think rates have started a major long term bear market. In other words, they're going to start rising. Prices will start falling. We've seen some sentiment extremes. For example, at the July high, we had well over 95% bulls. That was a key indicator to us that we're at the end of this long rally. Prices topped on July 11th. They've turned. Yields have risen. And I think we're in the very early stages of this long, long turn to the opposite direction, where rates will be moving erratically higher and prices radically lower. So this is one more component that we're following within our overall analysis.

AL: Interesting. So it looks like both rates and equities have long term turns, either in place or close ahead.

SH: They're coming. Right, exactly. I think the rates are leading equities a little bit here, just like they did back in '81. Rates peaked in April of '81. The US stock market didn't bottom until August of 1982. We might have a scenario similar to that now, where rates have made their turn, and now we're waiting for stocks to finished their Elliott wave pattern and turn to the downside.

AL: Well, thanks very much for your time, Steve.

SH: Thanks. Appreciate it, Alex.