We've all heard mainstream market commentators blame the recent DJIA declines on concerns with Greece's sovereign debts. But does that really explain the Dow's weakness?
The truth is, trouble in the countries that share the unfortunate acronym PIGS (Portugal, Italy, Greece, Spain) has been in plain sight for months. As early as December 2009, Elliott Wave International's Global Market Perspective reported the following:
Each of the PIGS economies has problems, but none more so than Greece, [which] has the least-loved bond market in the EU... the lowest bond rating in the union, and the highest debt-to-GDP ratio at over 91%. ... Both the stock and bond markets in Greece suggest economic weakness is dead ahead.
Investors in the Greek bond market demand almost 2% more from Greece than they do from Germany on a 10-year bond. While the levels are still substantially below those hit in late ‘08 and early ‘09, the upturn in both lines indicates that another round of risk aversion is in its early stages.
The EU has stated that it won’t let Greece default, but it’s clear that investors have concerns. Therefore, safety still seems to be the best option for investors while speculators may want to focus on the PIGS, and Greece specifically, for downside opportunities.
Elliott wave patterns saw trouble in Greece two-three months ago. But observe: At the time, the DJIA was happily rising, and few were talking about the "Greek menace." It's only after the DJIA slipped below 10,000 that everyone began to blame Greece.
From an Elliott wave perspective, this makes perfect sense. What drives broad trends in the stock market are not "fundamentals," but investors' interpretation of those conditions. We call it social mood. Two months ago, crowd psychology prompted investors to keep buying the Dow despite Greece's obvious problems; hope reigned. But after social mood pushed the Dow off a cliff (on January 19), fear took over, everyone rushed to find "the reason" for the decline -- and they found it in Greece.
This is only the most recent example of how collective emotions overcome the facts and evidence. And yet most investors continue to believe that news and events drive the markets. As EWI's president Robert Prechter put it in his recent Elliott Wave Theorist, "The exogenous-cause model fools investors exquisitely. One reason is that rationalization follows upon mood change. Mood change comes first, and attempts at reasoning come afterward." (More on that here.)
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