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Another Wall Street Myth Debunked (translated from elliottwave com)
On Friday, November 1, Fox Business reported, “The U.S. economy added 12,000 jobs in October, well below economists’ expectations.” Doesn’t sound good, does it? So it’s no surprise that the Dow Jones Industrial Average rose 450 points that day. Economic news, good or bad, does not determine stock market trends. Read this excerpt from Robert Prechter’s book, The Social and Economic Theory of Finance. Suppose we knew for certain that GDP would be positive every quarter for the next 3½ years, and that one of those quarters would surprise economists by posting the strongest quarterly GDP growth in half a century. Would you want to buy the stock? If you had acted on this knowledge in March 1976, you would have held the stock for four years, during which time the DJIA would have fallen 22%. If I had known at the end of the first quarter of 1980 that GDP would be negative in both the current and next quarters, and I thought the situation was bearish, I would have sold my stocks at the lowest price. Let's say you knew for sure that GDP next quarter would be the highest in 15 years. Would you want to buy the stock? If that event had occurred in the fourth quarter of 1987, you would have owned stocks during the biggest stock market crash since 1929. What's more, GDP had been on a long run of growth, with positive results every quarter for 30 straight quarters, including 20 quarters before the crash and 10 quarters after the crash. But the market still crashed. Three years after the start of the fourth quarter of 1987, despite ten straight quarters of GDP growth, stock prices were still below current levels. The chart below shows these two events. There seems to be something wrong with the idea that investors rationally value stocks based on GDP growth and contraction. In most cases, GDP and stock prices are correlated. But if exogenous causation dominates the field, they will always be related. This is wrong. In fact, they are often quite opposite. If news doesn’t determine stock market trends, what does? The answer is investor sentiment, as reflected in Elliott waves. “Elliott Wave Principles,” a guide for wave experts, is now available for free here. And don’t forget to subscribe to my Telegram channel.