Many investors might think the stock market is headed higher due to last week's slew of good economic reports.
The private sector added over seventy-five thousand more jobs than economists expected, unemployment fell to 8.6 percent (but with fewer people looking for work), Chicago PMI grew, sales at stores opened at least a year climbed, and October pending homes sales jumped.
In truth, however, economic reports lag market action. The latest economic data do not lead the stock trend:
"[Investor psychology] waxed positively for two full years until April of this year, when stock prices registered a high, stayed elevated through July and returned nearly to peak levels in October. Business decisions take time to implement, and expansive measures motivated near these peaks have been registering positive consequences since that time. Economic reports are lagging indicators...."
Elliott Wave Theorist, November 2011
Robert Prechter explained why in November 1999:
"The standard presumption is that the state of the economy is a key determinant of the stock market’s trends...
"If the standard presumption were true, then changes in the economy would coincide with or precede trend changes in aggregate stock prices. However, a study of [the chart below] will show that changes in the economy coincide with or follow trend changes in aggregate stock prices. Except for the timing of the recession of 1946 (which supports neither case), all economic contractions came upon or after a downturn in aggregate stock prices, and all economic recoveries came upon or after an upturn in aggregate stock prices. In not one case did a contraction or recovery precede a change in aggregate stock prices, which would repeatedly be the case if investors in fact reacted to economic trends and events. This chronology persists back into the nineteenth century as far as the data goes."
Here's a look at the chart Prechter mentioned:
Economic reports will not help you identify market turning points. The market's Elliott wave structure will.
The price pattern we see reveals a stock market trend which most investors do not expect.