A Sobering Look at "Market-Shattering Shocks"
How a news-based investment strategy can hurt your portfolio
by Bob Stokes
Updated: April 26, 2017
If investors would only review the historical data, they would discover the sobering truth about news and the stock market. Do you believe a presidential assassination or a major terrorist attack would affect the market's trend? Find out what really happened.
[Editor's Note: The text version of the story is below.]
The U.S. launched missile strikes against Syria on Thursday night, April 6, and many investors probably wondered if stocks would tumble on Friday, April 7.
After all, the conventional market view is that news drives the stock market -- and an act of war is very, very bad news.
But, as CNBC reported (April 10):
The market ... sold off nearly 1 percent in overnight trading following the U.S. cruise missile strike [but] recovered to a 0.08 percent loss for the day on Friday.
The market's behavior regarding the U.S. retaliation against Syria confirms what The Elliott Wave Theorist said in December 2012:
Aside from emotional reactions lasting just minutes, news does not cause the market to move in any meaningful sense.
And, when we say "news," we mean all news -- good and bad, economic, financial, political -- or geopolitical. For example, our May 2004 Theorist discussed the assassination of President Kennedy and said:
The market initially fell, but by the close of the next trading day, it was above where it was at the moment of the event.
And how about a major terrorist attack? Review this chart and commentary from the February 2010 Theorist:
The 9/11 attack occurred more than halfway through a dramatic price decline and only six trading days from its end. Afterward, despite deep concerns that more such attacks were in the works, the stock market rallied for six months. The first anthrax attack occurred on the very day of the low for the year, and the attacks, deaths and scares continued throughout the strongest rally on the entire graph. To put it more starkly, the market bottomed when they started and topped out as soon as people realized they were over.
So, there must be something other than news that's governing the stock market's larger trend.
In our view, the market is governed by Elliott waves, or patterns of investor psychology. Their psychology is that broad tide that moves the market, and it doesn't change based on the news -- it changes for endogenous reasons (we call them, social mood).
What's more, we've observed over almost 40 years of forecasting the markets all over the world that these patterns are repetitive -- therefore, they have predictive value.
With that in mind, we believe it's a good idea for every investor to learn what the market's unfolding Elliott wave structure is revealing about the weeks and months ahead.