At EWI's Message Board, readers ask us dozens of questions, daily. We try and answer everyone, and the best Q&As we publish for all to see. Below are our nominees in the "Best Question" category for the month of June.
How can stocks fall again if the economy is getting stronger?
-- In the major global stock market indices, from the U.S. to Europe to emerging markets, you contend that we are in a Primary Wave 2 up, and that the really nasty selling panic will ensue in the next downdraft of Wave 3. Yet, hard global economic data point to recovery globally by the end of this year. How does your Wave Principle square with the hard data, which indicate that even a retest of March 09 index lows is highly unlikely, let alone a collapse beyond them?
Answer (6/4/2009): That's exactly the kind of thinking that gets most investors buying at tops and selling at bottoms. The reality is that "fundamentals" -- such as the strong economy -- lag the stock market, not lead them. How else do you explain the fact that the DJIA topped in July-October 2007, in the midst of "goldilocks fundamentals"? Or that it bottomed in early March 2009, when the "fundamentals" were horrible? The list of examples goes on and on. That's why our April 2009 Elliott Wave Financial Forecast warned: "Primary wave 2 up is now unfolding, as the March 25 Interim Report communicated. Be prepared: In its final weeks, the advance will re-ignite some of the zaniness of 1999 and 2007... By the end of wave 2, many market followers and economists will proclaim that the bear market is dead and the boom is back. For those who felt trapped in stocks during Primary wave 1, wave 2 will offer a respectable place to exit. But we know from past experience (and the chart on page 2 of the March 2008 issue) that many will hold out for even higher prices, hoping to 'break even.'"
Consumer confidence: How does it fit into Elliott wave analysis?
-- I am curious as to how various measures of consumer confidence (like the huge reported increase in confidence we saw in the Conference Board report in late May, for example) fit into Elliott wave analysis. Is consumer confidence a measure of social mood?
Answer (6/10/2009): Consumer confidence, like most "fundamentals," follows the stock market, not lead it. The all-time high for consumer confidence occurred in October 1968. The Dow topped two months later and lost 36% over the next 18 months. Conversely, in February of this year, consumer confidence hit an all-time low -- and the DJIA bottomed days later. Confidence jumped in May -- after stocks had been rallying for two months. The May issue (online now) of our monthly Elliott Wave Financial Forecast (June and July issues are also online) had this to say about it: "The quick upward swing is symptomatic of a rally within a bear market, not a new bull market. In April, the Conference Board consumer confidence Index leaped 45% to 39.2, the second biggest jump on record. The biggest-ever increase came in April 1974, when three-quarters of the damage from the 1972-1974 bear market was still to come."
Feedback loop between stocks and economy: does it exist?
-- As I understand socionomics, social mood is the engine that drives pretty much everything. When a change takes place, it's first seen in the stock market and the economy follows, lagging. But what about a feedback loop? If a downturn in social mood leads to a decline in the stock market, doesn't the stock market then negatively affect participants' moods, who then sell stocks even harder? I have been a follower since 1980s and would be happy to hear you comment.
Answer (6/19/2009): If "feedback loops" existed, market trends would last forever: Good times would perpetuate everlasting euphoria while bad times would propagate perpetual pessimism. But that's not how it works in real life. Ironically, in bull markets, the better things seem to be, the harder we fall, and in bear markets, the worst news usually comes at a bottom. "Feedback loops" don't exist -- Robert Prechter, EWI's founder and president, came to this logical conclusion years ago in his Pioneering Studies in Socionomics (Chapter 27):
"I used to think that mood formed a feedback loop with events, which in turn reinforced the mood. I have since seen that this idea is erroneous. … If events formed a feedback loop with mood, then social trends would never end. Each new extreme in mood in a particular direction would cause more reinforcing actions, and those actions would reinforce that same mood, and so on forever. This is an untenable idea."
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