"Why is the market running up like it is with such bad news, massive debt, increased unemployment, increased defaults on mortgages and credit cards, bad debt at the banks, major corporation going into bankruptcy... Where is the top?"
That's a quote from an email we've recently received at EWI's Message Board. It's a good question. The DJIA bottomed in early March, in the midst of very grim economic news. News has improved only moderately since then, yet the Dow has been climbing confidently. You'd think that if nothing else, Chrysler's bankruptcy last week would have sent it lower. Instead, the Dow ended last week higher and is strongly up this week, too.
If news drives the stock market -- as just about every analyst, economist and commentator keeps telling us -- then how in the world can stocks be rallying?
Speaking of "the world," the story is similar across the globe. "Since the lows in March," reports The Financial Times, "the FTSE 100 is up 21 per cent, the pan-European FTSE Eurofirst 300 has risen 26 per cent and the Nikkei 225 Average has jumped 25 per cent. Yet, this powerful rebound does not sit easily with the still woeful news flow of poor economic data, deteriorating company results and the threat of another pandemic – this time swine flu..."
While this situation is puzzling for a lot of people, fans of Elliott wave analysis know the answer: News neither creates nor drives trends in the stock market. Yes, news reports can and often do send prices into volatile spikes. But it's clear even from the current disconnect between stocks and the news that major, broad trends in the stock market are created by something else. What?
Social mood. It's the driving yet intangible influence that, according to socionomics*, shapes trends in the stock market, economy and our culture at large.
Invisible it may be, but looking at 300+ years worth of the stock market's history, you can see that stocks do serve as a very reliable reflection of social mood. What's more, stocks usually pick up first on any major changes in our collective sentiment. That's why the stock market is a reliable leading indicator of the trends in the economy, politics, and even our culture.
Is it any wonder, then, that stocks topped in October 2007, before the economy tanked? Is it also any wonder that the Dow, DAX and NIKKEI all bottomed in March 2009, before the world economies showed signs of life? The stock market is on to something. It's rallying despite the bad news, indicating that social mood is improving and the worst of the crisis, at least for now, may indeed be behind us.
This is powerful knowledge. If you start looking at the stock market as a leading indicator, then while others are pouring money into the next bubble, you will know it's time for caution. And at the bottom, when everyone panics and hoards cash (as they did at the March lows), you will know it's time to buy. Think about it -- isn't that what "buy low, sell high" says you should do?
And with Elliott wave analysis, you can. To learn where global stocks (read: social mood) are likely headed in the next few weeks, read our latest Elliott wave forecasts -- risk-free for 30 days:
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