Stocks: How Sentiment Measures Offer Clues About What’s Likely Next
Insights into the stock market as a fractal
by Bob Stokes
Updated: December 15, 2022
Elliott Wave International's analysts track dozens of indicators, and our U.S. Short Term Update pays particular attention to those which may offer clues about the near-term.
Consider this analysis from our Sept. 26 U.S. Short Term Update:
Short term measures of investor sentiment indicate excess pessimism... Stocks should start a countertrend rally to relieve the downside compression.
No analytical method can guarantee an exact day and time a forecast will be fulfilled -- if it's fulfilled at all. However, some 13 trading days later, the Dow did hit a low. By Nov. 30, the senior index was more than 5,000 points higher. Excess pessimism had morphed into excess optimism. Fear had morphed into complacency.
Indeed, our November Elliott Wave Theorist noted:
By several measures, optimism at the current time is equal to or greater than that which held sway at the broad market's all-time high in November 2021 and at the blue chips' all-time high in January 2022!
The stock market pendulum usually starts to swing the other way when an extreme is reached -- in this case, extreme optimism. So, it hasn't been surprising that prices have mainly trended lower since around the beginning of December -- at least, so far.
So, are investors forever locked in to short-term swings between optimism and pessimism?
We all know the answer is "no" from looking at historic stock market charts. We see that short-term trends are part of intermediate term tends, which, in turn, are part of even larger trends and so on. In other words, the stock market is a fractal.
Here's an illustration and commentary from Robert Prechter's book, Last Call:
In 1938, Ralph Nelson Elliott... described the fluctuation of stock market prices as a fractal. He illustrated a patterned fractal in which movements in aggregate stock prices trace out five waves (of a certain description) in the direction of the one larger trend and three waves (or combinations thereof) in the countertrend direction.
[The illustration] is a stylized depiction of a full cycle of Elliott waves, with their traditional labels.
Key things for an investor to know is whether the "larger trend" is up or down, and the current juncture of the market in that larger trend.
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