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Russian Stocks: What's Driving the "Mystery" Rally?
How can the country's stocks rally while the economy keeps contracting
To most observers who compare the performance of Russia's stock market vs. its economy over the past couple of years, it must look as mysterious as the proverbial "mysterious Russian soul."
See for yourself. When Russia's main stock index (the RTS) fell off a cliff in May 2008, hardly any "fundamental" factor could have explained it. Crude oil and natural gas prices (the main drivers of Russia's recent growth) were rising fast, the economy was growing robustly, and Moscow's real estate market was booming. Despite that, between May 2008 and January 2009, Russian stocks fell like a rock (chart courtesy rbc.ru):
Russia's economy followed: In April 2009, the GDP fell by a whopping 10.5% compared to April 2008. Yet -- the RTS has more than doubled since January, baffling economists. "Despite continuing weakness in the Russian economy, the stock exchange here has surged to become the best performing in the world, after being the worst last fall," reports The New York Times.
If the economy drives stock prices -- as most analysts, economists and advisors keep telling investors -- then how can this be?
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It's only a mystery if you look at the situation conventionally. Practitioners of Elliott wave analysis, on the other hand, know that economic news neither creates nor drives trends in the stock market. The economy follows stocks -- a fact overlooked by the absolute majority of investors and their advisors. It's as true in the emerging markets as it is in the Western ones: Notice that the DJIA topped in October 2007, before the U.S. economy tanked, and bottomed in March 2009, before the economy showed signs of life.
This is powerful knowledge. If you start looking at the stock market as a leading indicator, then while others are pouring money into the next bubble, you will know it's time for caution. And when they panic and hoard cash (as they did at the March lows), you will know to look for a buying opportunity. Isn't that what "buy low, sell high" says you should do?