- Many fallacies are continually being propagated by the media about Covid's affect upon the market, as well as the Fed's impact upon the same.
- The market is still "destined" to rally to 4600SPX in 2021.
- The path to 4600SPX will likely be decided in the coming week.
- This idea was discussed in more depth with members of my private investing community, The Market Pinball Wizard. Learn More »
As we came into 2021, I outlined to those willing to listen that I expected at least a 20% continuation rally in the SPX, and I would prefer for us to strike at least the 4600SPX region this year. And, at the time, the SPX was in the 3750SPX region.
Thus far, the market has provided us with an 18% rally in 2021, and I still expect us to rally to 4600SPX this year. The question that we are answering over the coming weeks is simply a matter of the path to 4600SPX.
Now, as usual, I take the time to read other articles on Seeking Alpha to glean some of the thinking within the market. And, amongst the articles calling the market a “bubble” or “wrong,” as well as several others attempting to call the top yet again, there are a few issues I would like to address.
First, I have been reading many analysts viewing this rally as the Covid “recovery” rally. And, it really makes me scratch my head.
Does anyone realize that this “recovery” rally began well before any recovery in the death rates or the economy actually began? In fact, we struck bottom and began one of the strongest rallies in history despite the highest Covid death rates continually being reported for many more months, while a significant part of the country was going into economic lockdown, and when we were seeing record unemployment numbers:
So, is it really accurate to call this a “recovery rally” when it began many months before any recovery in death rates and the economy began? In truth, the rally had nothing to do with a Covid or economic recovery as it began many, many months before those recoveries began.
Yet, how many articles have you now read about how the Covid Delta variant is going to cause the market to crash again? But, think about it. If the highest death rates could not even slow the massive rally we saw last year, how can one reasonably assume that this variant, which has a low death rate, is going to put a dent in this market? Alas, analysts do not seem to be burdened by the facts, especially when there is a good story to be told.
Moreover, if this was a “recovery rally,” I would assume we would be approaching the 3400SPX region, which is from where the decline began from which we were “recovering.” But, being 1000 points higher than that right now, have we not exceeded the point to which we were trying to “recover?”
I think this is a ridiculous way to look at the market, and it actually sounds quite foolish when you think about it. But, hey, do you really think anyone else is thinking about this? Others may differ from my perspective, and many often do (smile). But, I think it is appropriate to at least bring your attention to the facts and recognize the fallacies being propagated by the media and analysts alike.
Second, I have been told more times than I can count that this is a Fed-driven market. And, I am told that if the Fed hints at its desire to take its foot off the pedal, then the market will tank. Moreover, I am quite sure that almost every single person reading this article believes this to be the ultimate truth of the market. Unfortunately, it is just another fallacy propagated by analysts and the media, which is not substantiated by the facts of history. Again, why should analysts be burdened by the facts when there is a good story to tell?
Not too long ago, in late 2015, I outlined my expectations for the market to drop from the 2100SPX region to a target in the 1750-1800SPX region. But, I was also noting that this would set up a “global melt-up,” during which time the SPX would see a strong rally to 2600+. At the time, the Fed was taking its foot off the gas, and everyone was expecting the resultingly certain market crash. So, many simply dismissed my expectations as the rantings of a lunatic.
As we know today, the market rallied 60% in an almost straight line within two years from the 1800SPX region low to almost 2900SPX, which certainly fit our expectation for a “melt-up.” Yet, how was this possible when the Fed took its foot off the gas?
This past week, I was told that if the Fed would begin hinting at taking its foot off the gas again, the market would certainly drop strongly. Well, the Fed hinted that it will be taking its foot off the gas, yet the market continued higher right after the announcement. Anyone seeing any issues here yet?
For those interested, I recently wrote an article highlighting the many other times during the last decade when we successfully traded in a contrarian fashion as we “fought the Fed,” and you can read that here:
Isaac Asimov noted that “[y]our assumptions are your windows on the world. Scrub them off every once in a while, or the light won't come in.” I think many investors need to take this to heart.
Yet, despite these historical facts, I am sure many will continue to argue this perspective with me because they have been so convinced of this fallacy by the media. So, rather than beating this dead horse, let’s move on to our market expectations.
Again, as we came into 2021, I expected that we would rally towards at least the 4600SPX region. In fact, my two main targets for 2021 were first 4400-40SPX, and then 4600SPX. This past week, we came within 11 points of that 4440SPX target, and the market is now faced with a decision.
As I have mentioned over the last several weeks, the smaller degree structure in the market is a bit more complex than normal. So, rather than provide you with the detail which you will not likely understand, I am going to simplify this update as much as possible.
I am still expecting a 200-300 point pullback in the market before we are ready to rally through the 4600SPX region. The question has always been if we see that pullback from the 4440SPX region, or from the 4600SPX region. Upper support in the market now resides between 4300 and 4350SPX. As long as that support holds in the coming week or so, the market has now provided us with a reasonable path in a more direct fashion to 4600SPX before that 200-300 point pullback begins. In fact, if the market chooses the direct path to 4600SPX, I think we can get there just as the summer is ending.
However, if we break 4300SPX, I think it is rather clear that we see 4165 before 4600, and that may even be a very direct and fast move. And, should the market take this path, I believe it will set up a rally into the end of the year that will attack the 4600SPX region, and potentially even exceed it before we turn the calendar into 2022.
At the time of my writing this article, I do not have a higher probability path just yet. I am seeking a bit more information from the market structure, which will likely present itself in the coming week, before I can make a higher probability assessment as to whether 4165SPX comes before 4600SPX. So, rather than tell you I am confident of something of which I am currently not, I am simply laying out the parameters for you, as the market likely will make its desire known in the coming week.
Now, for those that do not think this to be helpful, consider that the market has an infinite number of paths it can potentially traverse. Yet, we are able to narrow that infinite number down to several higher probability expectations. While I am not confident as to which of these two paths the market will take just yet, I am assuming that the market will make that clear to me in the coming week.
So, when one is able to narrow an infinite number of paths down in this manner, there is a tremendous amount of power presented within such an analysis, as well as within the methodology used to provide such a path. And, consider that this same methodology led me to my expectation for at least a 20% rally as we came into 2021, even though we saw a huge rally in 2020. In fact, this same methodology called for that huge rally in 2020 to 4000+ while we were in the depths of despair as the market was bottoming near 2200SPX.
If you would prefer greater detail of our analysis on a daily basis as we track through this more convoluted wave structure, you can feel free to join us for a free trial at The Market Pinball Wizard. My current assumption is that this pattern will likely solidify in the coming week, which can then solidify the path for the remainder of 2021, and into early 2022.
I would like to take this opportunity to remind you that we provide our perspective by ranking probabilistic market movements based upon the structure of the market price action. And, if we maintain a certain primary perspective as to how the market will move next, and the market breaks that pattern, it clearly tells us that we were wrong in our initial assessment. But here is the most important part of the analysis: We also provide you with an alternative perspective at the same time we provide you with our primary expectation, and let you know when to adopt that alternative perspective before it happens.
As I have said many times before, this is no different than if an army general were to draw up his primary battle plans, and, at the same time, also draw up a contingency plan in the event that his initial battle plans do not work in his favor. It is simply the manner in which the general prepares for battle. We prepare for market battle in the same manner.
So, while I will never be able to tell you with certainty how the market will move in the coming weeks, months, and years, I present you with enough information to know where my primary perspective is wrong so that you can adjust in order to take account for the alternative situation. And, until such time that the market proves our primary perspective is wrong, we will continue to follow our primary perspective, which at this time is pointing us to much higher levels in the coming years.
By now, I hope you recognize the difference in our analysis approach, other than the accuracy thereof. We strive to view the market, and utilize our mathematically based methodology, in the most objective fashion as possible, no matter how crazy it may sound. Moreover, it provides us with objective levels for targets and invalidation. So, when we are wrong in the minority of circumstances, we are able to adjust our course rather quickly, rather than fighting the market like many others you may read have been doing during this entire rally off the March 2020 lows.
So, while I hope I am helping many of you in maintaining an objective perspective within this non-linear environment we call the stock market, I want to wish you all well in your future trading and investment endeavors. As of now, I maintain my long-held expectation to see the market in the 6000SPX region in the coming years, of course, unless the market tells us otherwise. But, please approach the market with the respect that a bull market deserves, as surprises usually come to the upside, and we likely have much higher to go before this bull market ends.
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This article was written by
Avi Gilburt, CPA., is an accountant and lawyer by training and the founder of Elliot Wave Trader, where along with his team of analysts, he specializes in identifying the major turning points and market trends so you can invest more confidently while applying appropriate risk management.Avi is the leader of the investing group The Market Pinball Wizard where they help members gain a more real-time understanding of where the market is likely heading. Features of the group include: daily S&P 500 directional analysis, intraweek metals analysis, weekly expanded analysis on the S&P 500, metals, USO, and USD, weekly live webinars where we walk you through the charts we are tracking, and community chat with direct access to Avi and his team of analysts to ask questions. Learn More.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.
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