The Market Perspective

R N Elliott on the Effect of News

Tuesday August 4 2020

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A 90-Year-Old Investment Insight That's Relevant in 2020
R.N. Elliott’s work explains why stocks rallied despite Covid and other bad news

By Elliott Wave International

Many of you know that Ralph Nelson Elliott discovered the method of forecasting the markets that today we call Elliott wave analysis -- or, more formally, the Elliott Wave Principle.

R.N. Elliott lived from 1871 to 1948, and July 28 was his birthday.

A way to pay tribute is to mention one of the key observations he made during his years of studying the stock market (R.N. Elliott's Masterworks):

As the Wave Principle forecasts the different phases or segments of a cycle, the experienced student will find that current news or happenings, or even decrees or acts of government, seem to have but little effect, if any, upon the course of the cycle. It is true that sometimes unexpected news or sudden events, particularly those of a highly emotional nature, may extend or curtail the length of travel between corrections, but the number of waves ... remains constant [emphasis added].

What this means, simply, is what EWI subscribers have known for decades: News and events don't affect or create broad market trends. Of course, this seems to defy logic because most people believe that news and events are the very things that drive the stock market.

Yet, there was also a time when most people believed that only birds could fly. But what governs airplane flight, the buoyancy of metal ships, the light produced by an incandescent light bulb, radio transmission over the air -- and, yes, the Wave Principle of price formation in the financial markets -- is natural law.

Natural law is inherent in price patterns of stocks and other markets. Those are the patterns of the market participants' collective psychology, the true driver of price trends. That's why outside events do not materially influence the pattern's behavior.

In fact, often the stock market behaves in a completely opposite manner from what the majority of market observers would expect from the news.

Here's a chart and commentary from our July Elliott Wave Theorist, a monthly publication which has provided analysis of financial markets and social trends since 1979:

[This figure] is updated from the June issue and shows that on Sunday, July 12, Florida reported the largest tally, from any state, of new Covid cases since the pandemic began. Did the stock market care? No, it gapped up the following morning. This morning (Friday, July 17), Bloomberg reported that profit at the consumer banking unit of Bank of America has "plunged 98%," and overall profit at the bank is down by more than half. The U.S. banking system is in serious trouble. Does the stock market care? No, it gapped up on the day.

In the nearly 90 years since R.N. Elliott observed that news does not alter the market's wave pattern, his insight has been proven time and again.

So, it's wise to keep your market eye on what really matters: the Wave Principle of human psychology.

With that in mind, Elliott Wave International has made the online version of the book, Elliott Wave Principle: Key to Market Behavior, available for free.

Here's an excerpt from this Wall Street classic:

In the 1930s, Ralph Nelson Elliott discovered that stock market prices trend and reverse in recognizable patterns. The patterns he discerned are repetitive in form but not necessarily in time or amplitude. Elliott isolated five such patterns, or "waves," that recur in market price data. He named, defined and illustrated these patterns and their variations. He then described how they link together to form larger versions of themselves, how they in turn link to form the same patterns of the next larger size, and so on, producing a structured progression.

Learn about these patterns by reading Elliott Wave Principle: Key to Market Behavior -- 100% free.

All that's required is a free Club EWI signup. Club EWI is the largest Elliott wave educational community in the world and membership is also free.

Just follow this link to get started: Elliott Wave Principle: Key to Market Behavior -- free.

This article was syndicated by Elliott Wave International and was originally published under the headline A 90-Year-Old Investment Insight That's Relevant in 2020. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

 

VLO Alert

Monday after market close Aug 3 2020

VLO rolling over to the downside...

Dollar Completing Five Waves Down

Monday August 3 2020

The stock market had another thinning day of advance versus decline. 

Perhaps the better bet is the US Dollar.

 

the media is full of articles on how the weak US Dollar indicates declining US influence world wide, ie we hate Donald Trump.  But when such articles become mainstream it is time to look for a reversal. Indeed this was an up day for the US Dollar.

The Euro and Dollar have moved from one extreme to the other, now with the Dollar out of favor,time to short the Euro, more ideas tomorrow morning

The extreme set at the March 28 low has now reversed. This also suggests that if the currency extreme marked the stock market low, we may be seeing the opposite a stock market high now.

Breadth Continues to Narrow, What's Wrong at the Banks?

Weekend August 1 2020

The percent of stocks over their  50 day MA is falling. This indicates a lack of breadth Since the June 8 high you can see the small Wave One Down and then Two up. The late rally Friday did not improve things.

What's Wrong with the Banks?

Stocks rallied Friday afternoon to erase a 200+ point loss. But that did not improve the bank sector.

All red in this screen shot. CFR earned a tidy $93 M during the virus quarter but the stock ended the day do0w 2%.

Brokers were down as well.  In a coming bear market bad loans emerge.  This weakness in banks is suggesting just that.

Debt Expansion Goes Parabolic

I guess we need to call Malcolm Gladwell to determine the tipping point of debt to GDP  This will certainly test Modern Monetary Theory, ie, it does not matter since we own the printing press.

Corporate Debt

this graph ends in 2018 I suspect it has only risen higher since with ever cheaper interest rates. But this is a book end ot my question, what is wrong with the banks?  Too many bad loans...or loans about to be bad.

Junk Bonds
 One can almost hear the chart say EEK!  Is the last junk investor on board?

AMZN

A gap up in AMZN which has doubled since the March low. This explains the later rally Friday in overall index.

let's watch next week to see if this turns out to be an island reversal.

 

Social Mood

In  bear markets former pop stars lose their luster, the clay feet are exposed. We have seen this with  Matt Lauer, Weinstein, and Cosby, now Ellen.

I imagine ingenues will be lined up hoping to replace her if indeed she calls it quits, sounds like the network is weary of her salary demands. 

 

Junk in Vogue Again

Weekend August 1 2020

 

"Junk" Is Hot Again -- Despite Warning Signs
Default rates of low-grade corporate debt are rising

By Elliott Wave International

The demand for junk bonds is running high among global investors -- again.

As the Wall Street Journal noted on June 9:

Europe's riskiest corporate debt has rallied to pre-crisis levels.

Elliott Wave International's July Global Market Perspective, a monthly publication which covers 40-plus market worldwide, showed this chart and said:

The Bloomberg-Barclays Pan-Europe High Yield Total Return Index has retraced nearly 80% of its prior drop. Accordingly, the spread between European junk bonds and government debt narrowed to its lowest level since March 6, 2020. "When deals have come in the high-yield market in Europe, they have been well received," notes one credit strategist with JP Morgan Chase.

Yet, here's what's noteworthy: Global investors are swooping up risky corporate debt despite the fact that they've been warned of possible impending hazards.

As the July Global Market Perspective goes on to say:

[A] symptom of pervasive complacency is that investors are snapping up junk bonds despite a widespread understanding that default rates will skyrocket. According to estimates by S&P Global, the default rate for European speculative-grade corporates will hit 8.5% by March 2021, a three-fold increase from today's rate. In the United States, Moody's Investors Service expects the trailing 12-month default rate to hit 11.1% by March 2021. Goldman Sachs puts the percentage higher still -- at 13% before the end of 2020. More important, default rates are rising despite the concerted attempt by worldwide central banks to backstop the market. In April, the U.S. Fed began to purchase the debt of so-called fallen angels, which are companies that lost their investment-grade rating during the pandemic. The European Central Bank is about to follow suit. In June, ECB official Olli Rehn told reporters that he was keeping an open mind about implementing the same policy.

Junk bonds are issued by companies with the weakest balance sheets. Investors' claim on assets in the case of bankruptcy is usually next to the bottom rung, one notch above equity holders.

But, because the trend in junk bonds often aligns with the trend in equities, when stocks rise, indicating increasing appetite in "risk assets," so do the prices of junk bonds.

Of course, this also suggests that junk bond investors everywhere should be highly interested in the trend of global stock markets.

Elliott Wave International's analysts also cover other financial markets and economies worldwide.

Indeed, EWI has put together a free resource titled "5 Global Insights You Need to Watch."

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Get started by following this link: "5 Global Insights You Need to Watch."

This article was syndicated by Elliott Wave International and was originally published under the headline "Junk" Is Hot Again -- Despite Warning Signs. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

 

Record GDP Loss Since Records Began

Friday July  31 2020

Steepest GDP Decline in 70 Years

 

GDP fell at a 32.9% annual rate in the second quarter, the steepest decline in 70 years of record keeping

Germany’s Economy Hit Hard – down 347.7%

Mexico suffers deepest drop on record

Wall Street Journal Today

And so one might think the stock market would be in a tailspin. But instead it peaked February 12 and dropped about 30%. A handful of tech stocks have registered double-digit returns since. That action dragged most indexes towards the February highs. The tech heavy NASD in fact made a new high. Gold and silver have hit new recent highs

All of which once again proves that social mood, not news, powers social outcomes.

Consider that oil prices actually were negative just three months ago. Now inventories are dropping and in fact there is adequate storage facilities. As predicted here two weeks ago, prices have held the $40 floor and appear headed higher.

The billions injected by the FED in bond buying are being re-cycled back into stock purchases. That probably explains the tepid performance of 493 stocks versus the seven that are up 20%. It also explains whey cable tv can claim that stocks are in a new bull market but cannot seem to take out the February highs.

As I write today Friday bank stocks are signaling trouble. Cullen Frost Bank is down 3% even though it just made $93 Million during the past pandemic quarter. Caution is advised.

The world pandemic is what Nassim Taleb describes as a Black Swan event, an unexpected anomaly that conventional wisdom did not anticipate. Entire industries are being remade. Half of shuttered restaurants are not liable to re-open. Business travel will drop one –third to one-half declares former American Airlines CEO Bob Crandall.

K12 and Higher Ed will no doubt undergo profound changes as parents evaluate just what they were getting for the education tax or tuition dollar. The Presidential race may well hinge on the Democrats marriage with inner city teacher unions.

One last thought. Politico ran a piece suggesting Trump might go the way of LBJ in 19685. Then, a defeat by little known Eugene McCarthy in an early primary convinced LBJ to demure on the race. Trump does not see politics in a conventional liberal conservative sense. Rather he sees only winners and losers. And losing to Joe Biden who never could get nominated before would be a stunning defeat. Better to declare victory and head to Mar A Lago. And one has to wonder if Melania has not had enough of all this.   No doubt she promised to go along to get along but one term may be enough. It is hard to imagine she wants four more years of press mis-treatment. Dropping out at the virtual convention and handing the gavel to Nikki Haley would be a master stroke, the kind that made Donald a famous reality TV star.

Markets Finally Breaking Short Term Support

Friday July  31 2020

Noon CST

despite a better than expected earnings report, millions of dollars earned, CFR declined 4.23% today.

The market has ignored the pandemic since the late March low.  And it has ignored Chinese sabotage, economic downturn around the world so what might knock it off its perch

How about the prospect of neither side accepting the results of the election?

https://www.yahoo.com/news/new-yahoo-news-you-gov-poll-most-trump-voters-say-they-will-not-accept-the-2020-results-if-biden-wins-because-of-mailin-ballots-143828759.html

Democrats have contested every election they have lost at the Presidential level save for McGovern and 1984 Reagain lopsided win.  Recall all the furor over hanging chads when Gore did not want to concede to Bush. So now here we are.

more after market close

 

Denis Elam

Late Day Rally

Thursday July  30 2020

DJIA had traded below the early July high but rallied late probably on Apple and UPS good earnings.

Still the stocks we have been following CFR FRO VLO AMLP all pulled back. Ah the summer doldrums.  See you tomorrow.

The Decline Begins in Earnest

Thursday July  30 2020

We have been patiently awaiting a pullback at the end of July and start of August and then rally into the high seasonal at AUgust end.

It appears that has begun in earnest today after other selling earlier this week.

VLO for example is down 7% today

CFR down  2.74%

NS down 3%

DIV down over 1 %

AMLP down 2.65%

FRO -4%

 

Birth Rates Sharply Down in US

Wed July  29 2020

The US is now at a  1.7 replacement rate in new births,, so population creation is declining. This is true for most western countries.

This makes for a smaller economy but cheers to the climate change group, less pollution.

https://www.bloombergquint.com/businessweek/coronavirus-pandemic-americans-aren-t-making-babies-in-crisis

Even though the  2009 crisis is ten years behind us, the birth rate keeps dropping