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S&P 500: Why News-Driven Forecasts Are Not the Answer
The "fiscal cliff" deal came and went -- and with it, the rally in stocks?

By Vadim Pokhlebkin
Thu, 03 Jan 2013 18:15:00 ET
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On January 3, the S&P 500 went sideways, and the "fundamentals" are sending a mixed message.

On the one hand, you have the "fiscal cliff" agreement. On the other hand, the Fed minutes, released on Thursday, are said to be a reason for concern. And on Friday (Jan. 4), we have the U.S. jobs report, and factory orders, and the ISM non-manufacturing index number...
 
Over the years, we have observed that the news doesn't change the market's larger trend. Yes, the news can cause short-term price spikes. Although a) often, it doesn't, and b) when it does, it's often in the opposite direction of where the logic of the "fundamental" analysis would suggest.
 
See, if the markets always responded to the news logically, then, to quote Robert Prechter's research, "the stock market averages would look something like the illustration shown in Figure 2.
 
 
In such a world, the market would fluctuate narrowly around equilibrium as minor bits of news about individual companies mostly canceled each other out. Then important events, which would affect the valuation of the market as a whole, would serve as “shocks” causing investors to adjust prices to a new level, reflecting that new information.
 
Our idealized example shows what, under this model, would be the effects of a sudden slew of bad earnings reports, an unexpected terrorist attack with implications for many more to come, a large government “economic stimulus” program, a major contraction in GDP, a government program to bail out at-risk banks, a declaration of peace after a time of war and a significant decline in interest rates.
 
Now, take a look at how the markets behave in the real world. This is a chart of government bailouts vs. the stock market from our monthly Elliott Wave Financial Forecast:
 
 
As you can see, during the 1966-1982 bear market, bailouts that coincided with stock market's apparent lows were ultimately followed by lower lows. In 2008, the bailouts of Bear Stearns, Fannie/Freddie or Chrysler didn't stop the crash, either.
 
That's why here at Elliott Wave International, we make forecasts differently. Our U.S. Intraday Stocks Specialty Service, for example, relies on the combination of Elliott wave and trendline analysis to gauge the trend.
 
Right now, says editor Tom Prindaville, he is watching a trendline from the September/October S&P peaks as the next price target area for the index.

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