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The Right and Wrong Way to Analyze the Markets

Often, conventional explanations for market fluctuations are just rationalizations

by Bob Stokes
Updated: January 11, 2017

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[Editor's Note: The text version of the story is below.]

U.S. Treasuries have rallied lately, and one explanation you may have seen in the financial media says that the bond market is fluctuating because of the worries about Donald Trump’s upcoming presidency.

In fact, some analysts go so far as to imply that both the downs AND ups in bond prices lately have been due to the same reason -- i.e., uncertainty surrounding Donald Trump's programs.

By default, conventional financial writers search for exogenous-cause reasons to explain a market's moves. When a fitting reason is unapparent, they will often assign the same reason for both the down- and upturns.

But, let's consider the election of Donald Trump and the bond market.

The evidence shows that yields began trending sharply higher (bond prices falling) well before the election of Donald Trump.

Our July 6, 2016 Short Term Update showed this chart and said:

[30-year U.S T-bond prices] extended their rally to 177^04.0 today, where wave C carried to the level where it was 1.618 times the length of wave A. … The Daily Sentiment Index [trade-futures.com] of bond traders is up to 95% bulls and the Commitment of Traders data shows that Large Specs (as % of OI) were at 15.44% as of two weeks ago, an all-time record net-long position.

The belief that bond prices will continue to rally and yields will continue to decline is near universal, which, ironically, is exactly the condition that attends trend reversals.

Just four days later (July 10, overnight), 30-year Treasuries hit a high of 177^11.0 and then reversed lower.

This trend shift occurred four months before the election of Donald Trump.

Then, after a five-month decline, our Dec. 5 Short Term Update again used the bond market's Elliott wave price pattern and time-tested sentiment measures to make a bullish call:

A countertrend rally is fast approaching.

On Dec. 15, 30-year U.S. Treasury bond prices hit a bottom at 147^04.0, reversed and have since trended higher.

Was it the worry over President-elect Donald Trump's programs that triggered the rally? The fact is, those worries have been present all along. And all along, the bond market has followed the Elliott wave model, which has predicted both the July sell-off and the latest rally.

Blaming these fluctuations on the “worries” is simply rationalizing the moves that have already taken place.

Bonds represent just one financial market where commentators often use post-move, exogenous-cause rationalizations that fall apart upon examination.

On the other hand, at Elliott Wave International we apply a forward-looking model to financial markets. While not foolproof, it often helps you to actually anticipate market reversals that catch most investors by surprise.

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