Surely you've heard opinions that even if the stock markets in the U.S. and other developed countries experienced "a correction," the emerging markets would be just fine. Too much global demand for those stocks, they said, for them to take a big hit.
Well, here we are. It's August 2008, a little over a year into the global liquidity crisis. China's Shanghai Composite stock index is down 50% from its all-time high; India's BSE SENSEX is down about 40%; and Russia's RTS is down over 30%.
Not surprisingly, the mainstream financial media attributes these declines to macro-economic factors. But when it comes to the plunge in Russian stocks, they inevitably add another one: the Russian-Georgian military conflict. "Russian stocks hit a two-year low and the rouble weakened as fighting between Russia and Georgia unsettled investors," reported BBC on August 11.
The Russia-Georgia war is indeed a serious threat to the stability of the Caucasus region, and it's tempting to blame it for the plunge in Russian stocks. But let's check the chronology.
Here's a chart of Russia's RTS index spanning the past 6 months. As you can see, Russia's blue chips topped in mid-May of this year. And Russian troops only invaded Georgia on the opening day of the Beijing Olympic Games – August 8:
Clearly, the war occurred at the bottom of the sell-off, not at the top – as the conventional economic wisdom would have you believe.
As this example shows yet again, looking to the news stories for explanations of the stock market's trend is usually a complete waste of time. News doesn't create trends – collective mood of the people who trade and invest in those markets does.
We at Elliott Wave International study investors' collective mood daily – by tracking Elliott wave patterns in markets' charts. Every wiggle on a chart represents a shift in the levels of collective optimism or pessimism; every shift tells a story.
The results can be impressive. For example, check out this forecast for the decline in Russia's RTS stock index that our own European Financial Forecast made in April 2008 – several weeks before Russian stocks began to crumble. (Some labels have been erased for this publication.)
April 2008, European Financial Forecast: "The monthly chart of the Russian Trading System Index highlights the overall bearish potential of the market, because price seems to have completed five waves up (Figure 19). The Russian market might now develop the largest correction since the overall advance started in October 1998."
If you really want to know where stocks are headed – in the emerging markets or developed ones – forget the news. Focus on the changes in investors' mass psychology instead.