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How “Market Fundamentals” Can Get You into Hot Water

The widely held belief that stocks and rates are "linked" leads nowhere

by Bob Stokes
Updated: October 18, 2018

In the middle of the Oct. 16 trading session, as the DJIA climbed several hundred points, a major financial website said:

Corporate earnings news along with solid economic data helped lift investors' spirits and spur a 400-point Dow gain.

But you know that most, if not all, of the economic data in the past several months has been "solid," even when the DJIA plunged more than 1300 points on Oct. 10-11. Moreover, corporate earnings were also strong before that two-day stock market rout.

On Oct. 15, our U.S. Short Term Update pointed out similar faulty reasoning that would prompt a thoughtful investor to scratch his head. First, the Short Term Update showed these recent headlines:

  • Rising interest rates weigh on high-flying tech stocks (Associated Press, Oct. 11)
  • Dow drops 800 points... as stock market investors fear higher rates (USA Today, Oct. 10)
  • Stocks plunge amid rising interest rates (The New York Times, Oct. 10)

The U.S. Short Term Update commented:

The popular "explanation" as for why stocks fell hard last week was that interest rates were rising, as shown in headlines from recent news stories.

But we know this cannot possibly be the case because rates have been rising for more than two full years and during that entire period, stocks have been rising too.

The Oct. 15 U.S. Short Term Update then showed this chart and said:


The above chart shows the DJIA from 2016 as the top graph and the yield on 10-year U.S. Treasury notes as the bottom graph. These two assets have been trending in the same direction since 2016 and just last week we are asked to believe that yields are now causing stock prices to fall sharply? They did not cause stocks to decline two months ago or the month before that or two months before that, but now, suddenly, they are the culprit.

The real driver of the stock market is not "market fundamentals." It is investor psychology, which unfolds in predictable Elliott wave patterns on charts.

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