Last Friday (February 5) was yet another interesting day to compare the stock market action with the explanations from mainstream analysts. (This show never gets old, I swear.)
The day before, on February 4, the DJIA saw a jaw-dropping 268-point decline. Trading on Friday morning was cautious; headlines buzzed with explanations:
- Stocks Lower as Job Losses Continue (TheStreet)
- US Stocks Fluctuate as Sovereign Debt Concern Offsets Jobs (Bloomberg)
- Stocks falling on mixed jobs report, debt worries (BusinessWeek)
Around midday on February 5, the Dow was down almost 170 points. Everything pointed to another grim day. But around 2 PM blue chips reversed, erased the losses and closed higher.
Don't look for a good "fundamental" explanation for this turnaround: There was none. Days like that are usually swept under the rug. It makes zero sense that stock market investors -- rational, calculating individuals who know good or bad news when they see it -- would be so fickle.
The one explanation that does make sense relies on the Elliott Wave Principle: An individual investor can be rational, but groups of them are not. They herd, impulsively and irrationally. Bearish bias makes them overlook "lower U.S. unemployment rate" reported on Friday morning and sell. Bullish-minded investors brush aside "mixed jobs report, debt worries" and buy -- just like they did later that day. Note: The news didn't change on Friday, only investors' collective attitudes did.
It turns out that the news makes little or no difference for the broad trend -- something that Elliott wave practitioners have known for decades. Markets are not logical but emotional. EWI's President Robert Prechter has written a dozen books on this subject, and he talks about it in his monthly Elliott Wave Theorist. Collective emotions (a.k.a. social mood) unfold in patterns -- Elliott wave patterns, which makes markets probabilistically predictable. What's more, the higher the volatility, the clearer the patterns!
"Market volatility makes most investors less certain about market trends. Elliott waves, however, become clearer the more intense the market’s behavior. When social mood is changing dramatically, non-mood-related short-term noise has a minimal impact, so even waves of small degree adhere more closely to textbook forms." -- Bob Prechter, May 2009 Elliott Wave Theorist.
We've seen a lot of volatility in the past few days, and if Prechter's forecasts continue to play out, the VIX should only increase. It can be disconcerting, but Elliott wave analysis can help you stay calm. Read our latest global reports today, risk-free: