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Does the U.S. / Iran Conflict Spell Trouble for Stocks?

Look to social mood, not the news – the sell-off was due BEFORE the targeted killing of the Iranian general

by Bob Stokes
Updated: January 07, 2020

The reason for the DJIA's 234-point slide on Jan 3 was crystal clear to the financial media.

Two sample news items make the point:

  • Dow Set to Tumble After U.S. Airstrike Kills Top Iranian General (Marketwatch, Jan. 3)
  • Dow drops the most in a month after US airstrike on Iran's top military leader spooks investors (CNBC, Jan. 3)

But, was the airstrike the real reason that the Dow tumbled?

The timeline certainly fits. But consider that days before, stock market sentiment indicators and the Elliott wave model were already suggesting that a stock market slide was approaching.

Let's start with sentiment: Our Dec. 23 U.S. Short Term Update pointed out that the bulls were dominating the speculation in options. Put another way, two days before Christmas, investors were expressing a highly positive sentiment toward the stock market, a contrarian indicator.

That issue of the U.S. Short Term Update said:

Sentiment is clearly primed for a reversal.

Our forecast was based on our observations over the decades that when sentiment reaches an extreme -- optimistic or pessimistic -- a swing toward the other direction is usually at hand. This especially applies when sentiment measures line up with the Elliott wave model.

Speaking of which, our Dec. 27 U.S. Short Term Update used Elliott wave analysis when showing this chart and saying:

Dec27STU

The rally... should give way to a [stock market drop] in the New Year.

Well, that drop did occur on the second day of trading in the new year.

In other words, as implied a moment ago, several signs were pointing at a pullback in the broad market before the U.S. airstrike. Market participants were ready to push the "sell" button with or without any bad news.

Indeed, EWI's research shows that news and events never govern the stock market's broad trends, with the exceptions of very temporary blips.

The real governor of the stock market's trend is crowd psychology, whose trends unfold according to the Elliott wave model.

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