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How Countertrend Rallies Can Slyly Lure in Investors

“People are getting giddy about the market again”

by Bob Stokes
Updated: January 26, 2023

No market goes straight up or down without countertrend moves, which often fool investors into believing that the prevailing trend is over and a new one has started.

Indeed, during a countertrend rally in a bear market, stocks can sometimes become more overbought than at the previous high.

Speculative euphoria is often associated with these rallies. Just recently, the head trader at a money management firm said:

"People are getting giddy about the market again."

Perhaps the positive sentiment of these people will turn out to have been spot on down the road -- when we can look back with the benefit of hindsight.

Then again, hindsight might show that the current juncture was just another bear market rally that fooled a lot of people.

Mind you, getting fooled as an investor has nothing to do with intelligence. An investor can be brilliant and still get caught in a market trap psychologically.

As a classic case in point, Sir Isaac Newton was about as brilliant as one can get, and said:

"I can measure the motions of bodies, but I cannot measure human folly."

Newton said that after he lost big during the bursting of the famous South Sea Bubble. He had waited to the very peak to buy.

Elliott Wave International President Robert Prechter relates the story of another smart individual who got caught up in the euphoria of a rally -- a countertrend rally.

This is from a classic Elliott Wave Theorist:

Forty years ago, a brilliant and accomplished doctor asked me what I thought he should do with his portfolio of stocks. I looked at the purchase dates to find that he had bought all his shares in December 1968. December 2, 1968 was the day of the high in a B-wave advance in the DJIA. The average held near that level through December 13, when the Value Line Composite index... made an all-time daily closing high that stood for decades.

As you may know, a B wave during a bear market is an upward correction.

Getting back to the doctor's portfolio, Robert Prechter showed this chart and said:


Presuming my friend did not make his investment during the holiday season, he must have done so within a week of the top day in either the Dow or the VLC. The arrow in the chart shows that timing. The ensuing bear market crushed prices for 1968's high-flying stocks.

Yes, the doctor's investment decision occurred decades ago. Yet, keep in mind that the patterns of investor psychology never change.

Elliott waves reflect these patterns and can help you avoid making investment decisions at precisely the wrong times.

Follow the link below to learn the message of the stock market's current Elliott wave pattern.

The “Wait and See What Happens” Strategy? Maybe Not the Best

We've all heard the claim that "You can't time the market," and to just stick with stocks because they always "Go up in the long run."

On the other hand, you may be (rightly) concerned that the next bear market will be a real humdinger. You really just don't want to live through that. Besides, who knows if stocks this time will recover in short order.

All these thoughts may flitter through your mind as you consider a "wait and see what happens" approach... and hope you'll do the right thing at the right time.

Instead of "wait-see," perhaps reading our latest analysis will prompt you to start your preparation now.

Learn why by following the link below.

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