What Moves the Markets?
News? The Fed? The Real Answers Will Surprise You
Elliott Wave International’s free 118-page Independent Investor eBook explains why financial markets are NOT a matter of action and reaction
By Elliott Wave International
“There is no group more subjective than conventional analysts, who look at the same ‘fundamental’ news event a war, interest rates, P/E ratio, GDP, economic policy, the Fed’s monetary policy, you name it and come up with countless opposing conclusions. They generally don’t even bother to study the data.” — EWI president Robert Prechter, March 2004 Elliott Wave Theorist.
If you watch financial news, you probably share Bob Prechter’s sentiment. How many times have you seen analysts attribute an S&P 500 rally to “good news from China,” for example — only to focus on a different, supposedly bearish, news story later the same day if the rally fizzles out?
You need objective tools to make objective forecasts. So, we put together a unique resource for you: a free 118-page Independent Investor eBook, where you see dozens of examples and charts that show what really creates market trends.
Here’s a quick excerpt. For details on how to read the entire Independent Investor eBook online now, free, look below.
Independent Investor eBook
Chapter 1: What Really Moves the Markets? (excerpt)
Action and Reaction
In the world of physics, action is followed by reaction. Most financial analysts, economists, historians, sociologists and futurists believe that society works the same way. They typically say, “Because so-and-so has happened, such-and-such will follow.” … But is it true?
Suppose you knew for certain that inflation would triple the money supply over the next 20 years. What would you predict for the price of gold?
Most analysts and investors are certain that inflation makes gold go up in price. They view financial pricing as simple action and reaction, as in physics. They reason that a rising money supply reduces the value of each purchasing unit, so the price of gold, which is an alternative to money, will reflect that change, increment for increment.
Figure 4 shows a time when the money supply tripled yet gold lost over half its value. In other words, gold not only failed to reflect the amount of inflation that occurred but also failed even to go in the same direction. It failed the prediction from physics by a whopping factor of six, thereby unequivocally invalidating it.
Investors who feared inflation in January 1980 were right, yet they lost dollar value for two decades… Gold’s bear market produced more than a 90% loss in terms of gold’s average purchasing power of goods, services, homes and corporate shares despite persistent inflation!
How is such an outcome possible? Easy: Financial markets are not a matter of action and reaction. The physics model of financial markets is wrong. …
Cause and Effect
Suppose the devil were to offer you historic news a day in advance. … His first offer: “The president will be assassinated tomorrow.” You can’t believe it. You and only you know it’s going to happen. The devil transports you back to November 22, 1963. You short the market. Do you make money? …
[…continued in the free 118-page Independent Investor eBook]
- The Problem With “Efficient Market Hypothesis”
- How To Invest During a Long-Term Bear Market
- What’s The Best Investment During Recessions: Gold, Stocks or T-Notes?
- Why “Buy and Hold” Doesn’t Work Now
- How To Be One of the Few the Government Hasn’t Fooled
- How Gold, Silver and T-Bonds Will Behave in a Bear Market
- MUCH MORE
Keep reading this 118-page Independent Investor eBook now, free — all you need is a free Club EWI profile.
Breaking News Bulletin: News Is NOT the Main Driver of Stock Market Trends
A FREE myth-busting report from Club EWI reveals the real force behind long-term trend in financial markets
Conventional economic wisdom is founded on one core concept: namely, that events that exist outside the market (part of “market fundamentals”) trigger trend changes in the financial markets.
Because of this belief, you have the mainstream experts of finance watching everything from weather patterns to crop conditions, political exploits to the subtlest changes in punctuation in the Fed’s minutes — all in the hopes of anticipating the next big move in commodities, stocks, gold, the dollar, etc. In a nutshell, “positive” news and events cause a rise in prices, while “negative” news pushes prices down.
In reality, however, things are not as clear-cut. Markets regularly “ignore” the news, shrug it off — and move in the opposite direction of their “fundamental” cues. OR, worse waver in two different directions after the same event.
Take, for instance, the recent slew of news items following Federal Reserve chairman Ben Bernanke’s March 1 testimony before the Senate Banking Committee:
- “US Stocks Advance Ahead of Bernanke’s Testimony” (International Business Times)
- VERSUS — “US Stocks Turn Lower As Bernanke Testifies To Congress” (NASDAQ)
- VERSUS — “US Stocks Rise With Bernanke In Focus” (MarketWatch)
- VERSUS — “Stocks Decline As Bernanke Comments Fall Flat.” (Wall Street Journal)
What often ends up happening is this: Because the original event fails to predict the movement in stocks, commentators then sift through the day’s news feed in search of a different “trigger” — one that fits price action AFTER the fact.
The fallacy of a news-driven market is the first misconception exposed in Elliott Wave International’s Club EWI free resource “The Independent Investor” eBook. Here’s a short preview of this eye-opening report.
Chapter 1 opens with the question “What Really Moves the Market?” You then get the answer via riveting excerpts and charts from EWI president Bob Prechter’s monthly Elliott Wave Theorist publications, such as this one below:
“Suppose the devil were to offer you historic news days in advance. He doesn’t even ask you for your soul in exchange. He explains, ‘What’s more, you can hold a position for as little as a single trading day after the event or as long as you like.’ It sounds foolproof, so you accept. His first offer: ‘The President will be assassinated tomorrow.’ You can’t believe it. You and only you know what’s going to happen. The devil transports you back to November 22, 1963. You short the market. Do you make money?
The first arrow in Figure 6 shows the timing of the assassination. The market initially fell, but by the close of the next trading day, it was above where it was at the moment of the event. You can’t cover your short sales until the following day’s opening because the devil said you could hold as briefly as one trading day after the event, but no less. You lose money.”
Independent Investor eBook further exposes 10 other commonly held economic beliefs for what they truly are: Wall Street myths disguised as reality. Here’s what else you’ll learn:
- The Problem With “Efficient Market Hypothesis”
- How To Invest During a Long-Term Bear Market
- What’s The Best Investment During Recessions: Gold, Stocks or T-Notes?
- Why “Buy and Hold” Doesn’t Work Now
- How To Be One of the Few the Government Hasn’t Fooled
- How Gold, Silver and T-Bonds Will Behave in a Bear Market
- MUCH MORE
Keep reading this 118-page Independent Investor eBook now, free — all you need is a free Club EWI profile.
Earnings Do not Drive Stock Prices
Since the time of buttonwood trees, Wall Street has had its own version of the Ten Commandments — the cornerstone principles of conventional economic wisdom. The first of these writ-in-stone notions is the widespread belief that earnings drive the stock market.
By this line of reasoning, knowing where a market’s prices will trend next is simply a matter of knowing how the companies that comprise said market are expected to perform. On this, the recent news items below capture the public’s devoted following of earnings data:
- “Stocks Rebound As Investors Await Earnings.” (Associated Press)
- “US Stocks Drop As Earnings Data Fall Short” (MarketWatch)
- “Sideways Market Looks For Direction: Earnings Could Point The Way” (MarketWatch)
In reality, though, much of this belief is based on faith, not facts. While earnings may play a role in the price of an individual stock, the stock market as a whole marches to a different drummer.
You get this ground-breaking revelation in the FREE report from Club Elliott Wave International (Club EWI, for short) titled “Market Myths Exposed.” In Chapter One, our editors shatter the smoke-screen surrounding the widespread notion that “Earnings Drive Stock Prices” with these enlightening insights:
- “Quarterly earnings reports announce a company’s achievements from the previous quarter. Trying to predict futures prices movements based on what happened three months ago is akin to driving down the highway looking only in the rearview mirror. It leaves investors eating the markets dust when the trend changes.”
- And — There is no consistent correlation between upbeat earnings and an uptrend in stock prices; or vice a versa, downbeat earnings and a decline in stocks. Case in point: During the 1973-4 bear market, the S&P 500 plummeted 50% while S&P earnings rose every quarter over that period. Here, “Market Myths Exposed” provides the following, visual reinforcement: A chart of the S&P 500 versus S&P 500 Quarterly Earnings since 1998.
As you can see, the market enjoyed record quarterly earnings right alongside the historic, bear market turn in stocks in 2000. Then again, the first negative quarter ever in 2009 preceded the March 2009 bottom in stocks.
“Market Myths Exposed” dispels the top TEN fallacies of mainstream economic thought. The misconception that “Earnings Drive the Stock Market” is number one. The remaining nine are equally capable of knocking your socks off and most importantly, helping you protect your financial future.
Get the 33-page Market Myths Exposed eBook for FREE
Learn why you should think independently rather than relying on misleading investment commentary and advice that passes as common wisdom. Just like the myth that government intervention can stop a stock market crash, Market Myths Exposed uncovers other important myths about diversifying your portfolio, the safety of your bank deposits, earnings reports, inflation and deflation, and more! Protect your financial future and change the way you view your investments forever! Learn more, and get your free eBook here.
Do Strong Earnings Mean a Strong Stock Market?
Earnings season is upon us, so it’s a good time to delve into how earnings affect stock prices. Here’s an excerpt from Bob Prechter’s February 2010 Elliott Wave Theorist. It considers the conventional belief in a cause/effect relationship between earnings and stock prices. EWI’s 50-page Independent Investor eBook includes the entire report on the effect 10 different economic events, political events, and monetary and fiscal policies have on the market. You can download it now for free.
Claim #4: “Earnings drive stock prices.“
This belief powers the bulk of the research on Wall Street. Countless analysts try to forecast corporate earnings so they can forecast stock prices. The exogenous-cause basis for this research is quite clear: Corporate earnings are the basis of the growth and the contraction of companies and dividends. Rising earnings indicate growing companies and imply rising dividends, and falling earnings suggest the opposite. Corporate growth rates and changes in dividend payout are the reasons investors buy and sell stocks. Therefore, if you can forecast earnings, you can forecast stock prices.
Suppose you were to be guaranteed that corporate earnings would rise strongly for the next six quarters straight. Reports of such improvement would constitute one powerful “information flow.” So, should you buy stocks?
Figure 9 shows that in 1973-1974, earnings per share for S&P 500 companies soared for six quarters in a row, during which time the S&P suffered its largest decline since 1937-1942. This is not a small departure from the expected relationship; it is a history-making departure. Earnings soared, and stocks had their largest collapse for the entire period from 1938 through 2007, a 70-year span! Moreover, the S&P bottomed in early October 1974, and earnings per share then turned down for twelve straight months, just as the S&P turned up! An investor with foreknowledge of these earnings trends would have made two perfectly incorrect decisions, buying near the top of the market and selling at the bottom.
In real life, no one knows what earnings will do, so no one would have made such bad decisions on the basis of foreknowledge. Unfortunately, the basis that investors did use–and which is still popular today–is worse: They buy and sell based on estimated earnings, which incorporate analysts’ emotional biases, which are usually wrongly timed. But that is a story we will tell later. Suffice it for now to say that this glaring an exception to the idea of a causal relationship between corporate earnings and stock prices challenges bedrock theory.
For more of Robert Prechter’s analysis of cause/effect relationships in the markets, download EWI’s FREE 50-page Independent Investor eBook. It includes essays from recent issues of The Elliott Wave Theorist and its sister publication The Elliott Wave Financial Forecast, in addition to a full chapter from the New York Times bestseller, Conquer the Crash. Download your free eBook.