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True or False: Inflation = Stock Market Sell-off?

Before you answer, recognize that the “market has a law of its own”

by Bob Stokes
Updated: May 18, 2021

The topic of inflation has been grabbing a lot of financial headlines.

Indeed, financial journalists have "blamed" inflation for recent stock market sell-offs.

On May 11, when the Dow Industrials closed 475 points lower, an intraday headline said (Reuters):

Wall Street drops on inflation jitters, led by tech stocks

The next day, on March 12, the sell-off persisted. Another financial news source noted (CNBC):

Dow tumbles 680 points in worst decline since January as hot inflation reading spooks investors

So, at least two news organizations agree that inflation was the culprit behind the sell-offs.

However, investors who follow the news closely may have done a little head scratching. Meaning -- at the start of the same week (May 10) -- the Dow climbed to a record high. So, were inflation worries absent on that day? Not according to this May 10 headline (CNBC):

Americans fear highest inflation in nearly a decade

So, same inflation worries, but the Dow went up instead of down.

And, sticking with the same week, the Dow climbed more than 400 points on May 13 and turned in another triple-digit gain on the 14th.

So, to sum it up, during a five-day stretch, the Dow closed higher three times and lower twice.

Does it make sense that investors only paid attention to inflation concerns on a Tuesday and Wednesday, but not on a Monday, Thursday and Friday during the same week? Hardly.

As Frost & Prechter's Wall Street classic, Elliott Wave Principle: Key to Market Behavior, says:

Sometimes the market appears to reflect outside conditions and events, but at other times it is entirely detached from what most people assume are causal conditions. The reason is that the market has a law of its own. It is not propelled by the external causality to which one becomes accustomed in the everyday experiences of life. The path of prices is not a product of news.

Well, if news and events don't drive market prices, what does? The answer is the Wave Principle. Let's return to the book:

The Wave Principle is governed by man's social nature, and since he has such a nature, its expression generates forms. As the forms are repetitive, they have predictive value.

Specifically, a financial market trend takes the form of five waves. After those five waves have unfolded, a new trend in the opposite direction is set to start.

Now is the time to find out the position of the Dow Industrials in that five-wave structure so you can prepare for the next trend change.

Follow the link below to tap into the insights inside our flagship investor package.

A "Must-See" Chart Setup for U.S. Stocks

Our May 14 (Fri.) U.S. Short Term Update said:

It was a volatile week for U.S. stock indexes. The Dow Industrials registered an outside-down week...

Learn exactly what "an outside-down week" means -- and why it's imminently important. You can do so by reading our U.S. Short Term Update -- a thrice weekly publication which focuses on the near-term for major U.S. financial markets.

The U.S. Short Term Update is part of our flagship investor package which also includes our intermediate- and long-term outlook for U.S. stocks, bonds, gold, silver, the U.S. dollar and more.

Now is the time to get up to speed so you can position your portfolio accordingly.

Follow the link below to see an Elliott wave chart setup that should be on the radar screen of every investor.

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