Remember the scene in Jurassic Park when that dinosaur hunter is trying to outsmart the raptors? He is carefully stepping through the jungle -- then stops. He spots a raptor and lifts his gun. Out of nowhere, the raptor appears on his flank -- checkmate. Before it shreds him apart, being a studious dinosaur student to the end, the hunter admiringly says, "Clever girl."
In the real world of finance, the market too seems to have a clever mind of its own -- constantly devising ways of fooling the majority by taking almost any path other than what's expected by most. That was the stock market story of bygone days; this remains the story of today. It's the nature of treasure seeking -- traps await and skeletons litter the path. Only a few of the "worthy" ever come out "financially alive."
"Markets can't fool all of the people all of the time, but they do fool most investors at the most important times. As they transit from a persistent rise to a long and deep bear market, they do everything in their power to convince investors that the long term trend is up."
For a number of very good reasons, we at Elliott Wave International believe that one of those "important times" is now. The Dow has closed up for 10 out of the past 11 weeks, yet the NYSE advance/decline and up/down volume oscillators are telling a cautionary story. Plus, market optimism is high -- an indicator that has a history of marking tops.
Are the majority of investors positioned, psychologically and financially, to be fooled again -- just like they were at the October 2007 top, when the DJIA closed above 14,000 and then spent the next 18 months in the worst crash in seven decades?
Three months before the October 2007 top, on July 17, Elliott Wave International's president Robert Prechter issued an urgent Elliott Wave Theorist to subscribers and said:
"Even though the Dow has closed up for the past three trading days, the average advance/decline ratio for this time is below 1.00, indicating that more stocks fell each day on average than rose. Weak breadth over the past five trading days relative to Dow points gained confirms this rise as all or part of a fifth wave. We may be early by a couple of weeks, but the market has traced out the minimum expected rise, and that’s enough to act upon."
It's safe to say that only a small minority acted at the 2007 top -- the rest of investors were fooled by the smoke and mirrors of the "goldilocks economy." It's also safe to say that the same majority were panicking at the March 2009 low, when the Dow slipped below 6,500.
"Unfortunately, most people won't do anything but hang on until the ultimate low, at which time they will sell. Crowd behavior is probabilistically predictable."
-- The Monday-Wednesday-Friday Short Term Update, April 22 (online now).
No one knows for sure what the future holds. But there is one thing we're sure about -- the extent to which several important market indicators again are lining up is rare.
Empower yourself -- know what this "once-in-a-decade" alignment is revealing. Join the informed minority -- click here for instant access to your risk-free read of our comprehensive Financial Forecast Service.