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You watch financial news, you know what's going on. Spooked by "concerns over a potential U.S. recession," investors are dumping shares on both sides of the pond.
If you ask us, what's going on here is as old as investing itself: fear and greed. Fear and greed move investors. Fear and greed move market prices, too. As long as greed prevails, none of the economic, political or other problems matter. But as soon as fear takes over, everyone runs for the exits, pointing fingers at the problems that have been in plain view all along.
To wit, in a March 6 article titled "Research Shows Fear is Driving Recessionary Trend," Riskcenter.com reports that,
"Increasing pessimism about the U.S. economy… is a spiral effect driven by fear. As fear-based climate is causing consumers to lose confidence and cut back on their spending, banks will tighten their credit policies and turn a false perception of doom and gloom into reality, thus driving the economy into recession. While this response is driven by the perceived fear, it is in fact, out of proportion with the actual condition of the U.S. economy."
Ah, but there is the rub: The fact that the current fear is "out of proportion" is irrelevant. Two years ago, when real estate prices were breaking records, it was clear to many that homeowners' optimism was "out of proportion" with reality, too – but did it stop anybody? My point is that whether you are in a financial bubble or its opposite – a financial panic – rational thinking goes out the window; what reins are fear and greed.
This cycle of collective human emotions is precisely what the Elliott Wave Principle describes and studies. Wave patterns in market charts are nothing but fear and greed wrestling each other right before your eyes. And lately, it's the fear that’s been winning.
This trend began last summer. In August 2007, Elliott Wave International's Senior European Stocks Analyst Tom Denham warned his subscribers that,
"European stock indexes are especially vulnerable now that they have completed five waves up."
What Tom referred to was a basic Elliott wave concept that after a five-wave rally always comes a three-wave pullback, like this idealized diagram shows:
European stocks developed their "five waves up" between March 2003 and the end of last summer. This chart from Tom Denham's latest analysis shows that rally in Germany's DAX stock index:
"Thanks to the lingering memories of a strong rally," wrote Tom back in August, "most people find it difficult to imagine markets falling sharply."
Well, now they have. So, stocks can rise and fall. The question is, how deep might the current decline in European bourses go? We have a few answers waiting for you right now -- just look below for details on a risk-free subscription.