Sentiment Speaks: 'This Market Makes No Sense'

Summary

• Most investors and analysts have been scratching their heads while the market has continued to rally.
• The easy money on the long side has now been made.
• The next two months will tell us how the rest of 2020 will go, and potentially even well beyond.
• This idea was discussed in more depth with members of my private investing community, The Market Pinball Wizard. Get started today »

The title to this update is likely the most repeated phrase you have heard over the last month from market participants and analysts alike. As more and more bad economic news is presented through the media, somehow, the market just keeps grinding higher.

I think this picture taken from one of Jim Cramer’s shows expresses the disconnect best:

Doesn’t the market understand what everyone else clearly “knows:” we are heading into the next Great Depression?

As I have always tried to make people understand, the stock market and the economy are not one and the same. Rather, there is a reason that the stock market is considered the best “leading indicator” for the economy. And, it is purely because market sentiment (the true underlying driver of the stock market) is seen in action much quicker within the stock market as relative to the fundamentals within the economy, which take time to catch up to the market action.

To put it most simply, consider how long it takes you to effectuate growth in a business when sentiment turns bullish (obtaining funds, placing those funds to work in producing goods and services, marketing and selling those goods and services, earning profits, etc.) as compared to how long it takes to press the button on a computer to buy a stock. It is simply much faster to effectuate a turn in sentiment in the stock market than in the economy. And, this lag explains why the stock market always bottoms well before you see a turn in the economy.

As I read in other articles of late, it is quite clear that many have missed this rally off the 2191SPX bottom and are in complete disbelief due to their lack of understanding of what I just outlined above.

In fact, these are a smattering of the comments I have received from my prior two articles wherein I was calling for higher levels to be struck in the market:

“This "market" is so RIGGED it's pathetic . . . Highest unemployment in decades and the "market" roars back faster than it ever has in over EIGHTY YEARS? I feel like I'm in some parallel matrix of backwards reality”

“buying in to this rally is absolute suicide.”

“If you think this is over you are simply wrong”

“This bear market is just getting started.”

“Bulls are so incredibly delusional if they think this is over”

While it is clear that most investors have reacted quite emotionally to the events of recent days, that is often the worst way to approach the market. So, let’s take a step back and review where we have been and then we can look to where we are likely going.

For those that have been following my analysis closely, you would know that I was building a short position in the EEM back in January and February, as it was presenting the clearest break down pattern, along with providing us with a very low risk set-up with wonderfully defined parameters. Moreover, as I wrote regarding the SPX late last year and early in 2020, if the market was going to break down below the 3100SPX level, it would open the door to take us back down to the 2200SPX region.

And, as we approached that 2200SPX region in March of this year, I highlighted to the members of The Market Pinball Wizard my expectation that the SPX should bottom in the 2187SPX region, and rally back up towards the 2600-2725SPX region from there. As we now know, the SPX bottomed at 2191 (within 4 points of my targeted support), and we clearly rallied back to our original 2600-2725 target.

However, as the market moved into the 2600-2725SPX target zone, the structure made it quite clear to us that this rally had not run its course. Rather, the structure was actually pointing us to the 2890SPX region, as I highlighted in my last public article as well. So, we set our sights on the 2890SPX target. The market then proceeded to rally to the 2879 level (within 11 points of my target), whereas the futures struck my target.

For those that followed my analysis closely, you would know that once we struck this target region, I expected a pullback to be seen. Ideally, that pullback would hold the 2700SPX region before continuing higher. As we know today, the market proceeded to pullback from the 2890SPX target region, and bottomed at 2727SPX. Thereafter, we began a rally that has struck a high of 2955SPX (with 20 points higher seen in the futures).

Now, you are either thinking to yourself that this is the luckiest guy in the world or that this is some kind of voodoo.

But, to be honest, this is simply our Fibonacci Pinball system of Elliott Wave analysis, which provides us with these high probability targets on both the upside and downside as the market acts as a pinball through these Fibonacci extensions and retracements we track in the standard structures we see quite commonly in the market.

When the market is acting in a standard manner, then it moves through these targets in an almost perfect “pinball-like” manner. However, if the market reacts in a manner outside of these standards, it provides us an early warning that something else is playing out and allows us to move into our alternative plans, which have been outlined well before the diversion from the standard occurs.

So, what does our methodology suggest at this point in time? Well, when the market rallied into the 2900-2950SPX region this past week, the structure of the market told me that the risks have risen high enough for me to suggest to the members of The Market Pinball Wizard that they should significantly reduce their long positioning within the 2900-2950SPX region. Allow me to explain.

In the most bullish case scenario, we expected the market to rally from the 2191SPX region back up to the 3200/3300SPX region. That means that once we moved into the 2900-2950 region, we caught 70% of this rally off the March low rather safely. But, the last 30% carries with it the most risk, as I cannot be certain that the market will reach the most bullish target in my expectations.

Now, this is where our Fibonacci Pinball method of Elliott Wave analysis provides us even more insight when it comes to market context. Even if the market provides us with the most bullish scenario of a rally to the 3200-3300 region, I would then expect a pullback in the market to the 2600-2800 region. So, considering we caught the rally from 2191 to 2950SX, and we will likely come back down to levels lower than that later this year, I questioned if it was really worth the risk for the remaining 30% overhead?

So, as I outlined to the members of The Market Pinball Wizard, the easy money on the long side in the market has been made as we moved into the 2900-2950SPX region. And, now the market is going to tell us in the coming two months whether it will continue higher to complete 5-waves off the 2191SPX level or not.

If we do complete those 5 waves into the 3200-3300SPX region, then I am going to prepare to “buy-the-dip” into the 2600-2800SPX region. However, if the market is unable to complete this 5-wave rally structure off the 2191 low, then it will open the door to a drop to the 2060SPX region in the coming months. While I am going to leave the finer details of how I view this within the members section of The Market Pinball Wizard, I hope I am being clear that risks have risen to the point where one has to question if they are worth the rewards on the long side of the market at this time.

So, again, if you have been following my work, then not only did you catch most of the decline earlier this year, but you have now also caught the rally from the 2200 region to the 2900 region. I would say you have now likely had the best year of your career, and it is time to head to the sidelines to see how the next few week’s shake out.

But, this brings me to other comments I see quite often. And, it really gives me a chuckle when I see them from fellow “contributors,” such as this one, which was posted in response to my public analysis calling for a major rally off the 2200SPX region:

“You want "really silly." That's really silly. And anyone who cannot see that isn't playing with all their circuit breakers on... The market is delusional, and you, rather than following the news cycle, which obviously the market is not following, are following the market.”

Well, my friends, those that have been following the “news cycle,” as suggested by this other “contributor,” have been scratching their heads as the market has rallied 35% off the lows we caught back in March. And, yes, we have been following the market. Does that make the 35% we have earned on the long side a delusion? Well, I keep looking at my account and it certainly looks real.

And, that last sentence penned by this “contributor” really made me scratch my head. If one realizes that the market is not following the news cycle, does it make sense to continue to follow the news cycle? Well, I guess if your goal is to prove that you are smarter than the market, you continue to follow the news cycle. But, if your goal is to maximize profits from the market, then you have to question what this person is really doing.

You see, folks, markets do not work based upon news cycles and logic. Rather, markets are driven by emotion. And, unless you understand how emotion drives the market, you will be standing on the sidelines, scratching your head, and thinking the market is delusional due to your superficially correlated news cycle perspective, while others reap the profits from their more sophisticated and advanced level of understanding the market.

I have said this before, and it is certainly worth repeating. Unless you understand the larger market context, then you will often be scratching your head when you see moves that defy logic. And, I have not seen any better methodology to provide market context then our Fibonacci Pinball method of Elliott Wave analysis. Does that mean we will always be right in our assessments? Absolutely not. But, our analysis is quite accurate the great majority of the time. And, if the market deviates from our primary analysis, we are able to adjust rather quickly, as that is also part of overall methodology.

At the end of the day, some of you view me as crazy, some of you view me as practicing voodoo, and some of you view me as simply lucky. But, you will never be able to view me as a perma-anything. You see, those that are perma-bulls will be right most of the time because the market rises the great majority of the time. Yet, they will also get caught looking the wrong way during the periods of major draw-downs, such as what we experienced in February and March of 2020. And, those that are perma-bears are more like a broken clock. But, when they are “right,” boy do they turn loud and boisterous. And, we certainly heard from them in March, yet they have been rather quiet in April.

As for me, I am perma-profit. My goal is to simply listen to the messages in market price structure, and endeavor to be on the correct side of the market for the greatest majority percentage moves the market has to offer, while balancing reasonable risk management strategies.

So, to answer that “contributor’s” comment to me in my last articles, yes, I will continue to discount the news cycle and follow the market. And, while you may consider me to be “delusional” in doing so, the profits earned by me and the members of The Market Pinball Wizard are clearly not a delusion.

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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.