Here's What Stock Market Bulls Might Be Overlooking
A growing economy is not necessarily bullish -- see for yourself

By Elliott Wave International

Editor's note: You'll find a text version of this story below the video.

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On Friday (Feb. 27), the 4th quarter U.S. GDP was revised downward to 2.2% from the original 2.6%.
"U.S. stock markets shrugged off the revision," wrote Fox Business. And why wouldn't they -- after all, the conventional wisdom says that as long as the economy is growing, so is the stock market.
Except, it's not exactly true.
See, if that notion were true, then you'd have to assume that the U.S. economy was in a bad shape in 2007, when the stock market began its biggest decline since the Great Depression. But the facts show the opposite.

When the Dow topped in October 2007, key economic measures were indeed strong:

• In the quarter preceding the market peak, GDP expanded at 2.7%
• Unemployment in 2007 was 4.6%
• Consumer confidence was very strong, too (top red circle; chart: Bloomberg)

If a strong economy means a strong stock market, then stocks should have continued higher. They didn't. The Dow fell more than 50% over the next year and a half:

If you think that's counterintuitive, then fast forward to early 2009. That's when we saw the opposite economic picture:

• Consumer confidence fell to an all-time low (the second red circle on the blue chart)
• GDP growth fell to a negative 5.4%
• Unemployment rate more than doubled to almost 10%

Because of such terrible economic data, few mainstream economists were optimistic in early 2009. And yet the stock market bottomed in March of that year.
This reminds me of a quote from our monthly Elliott Wave Theorist:

"Suppose you were to possess perfect knowledge that next quarter's GDP will be the strongest rising quarter for a span of 15 years, guaranteed.
"Would you buy stocks?
"Had you anticipated precisely this event for 4Q 1987, you would have owned stocks for the biggest stock market crash since 1929.
"GDP was positive every quarter for 20 straight quarters before the 1987 crash -- and for 10 quarters thereafter.
"But the market crashed anyway."

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Technical Analysis of the DOW Industrials

When an Over-Ripe Market is Ready to Spoil
Reliable internal measures tell a story investors need to know
September 7, 2012

By Elliott Wave International

Anyone who enjoys eating fruit knows there's a fine line between ripe and over-ripe.
If it sits in the fruit bowl too long, over-ripe turns rotten.
As experienced investors know, the stock market goes through similar phases. An overbought, or over-ripe, market can spoil quickly.
Take a look at this chart for example (wave labels removed), and ask yourself, is the stock market on the verge of spoiling?

The Aug. 10 Financial Forecast Short Term Update provides commentary to go with the chart.

[An] indicator that has moved to an overbought condition is 10-day NYSE Trin (advance/decline ratio divided by the up/down volume ratio). Wednesday's close [Aug. 8] was .937, which was the most overbought level since March 26, when 10-day Trin closed at .900 (see gray vertical line). That was five days prior to the April 2 S&P top. It's certainly possible that Trin becomes even more overbought prior to a market high, but it doesn't have to. Current levels are the exact opposite of those that attended the August, October and November 2011 lows, as marked on the left side of the chart.

EWI also looks at several other internal measures.
A healthy bull market sports broad participation among different sectors and indexes. Up days are consistently accompanied by high volume; momentum is strong.
The indicators EWI watches suggest this market is indeed overbought and still ripening.

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DOW Jones Industrials Below 12,000 !!

Six Straight Weeks of Decline Take DJIA Below 12,000: What Now?
Before blaming falling stocks on the most recent weak economic reports, let's check some dates 
June 14, 2011

By Elliott Wave International

As of June 10, the Dow has suffered the "longest losing streak since the fall of 2002. The market's last seven-week stretch of losses began in May 2001, as the dot-com bubble deflated," reports The Associated Press.
As for why stocks are falling, most observers agree: Blame "weaker hiring, industrial output, and a moribund housing market." The economic reports from the past two weeks made that clear.
But wait a minute. The DJIA didn't top in the past two weeks -- it topped on April 29. At the time:

• U.S. unemployment benefit applications had been trending down/flattening. In fact, "The unemployment rate fell last month in more than 80% of the nation's largest metro areas," said an April 27 AP report.
• U.S. industrial output was up. In fact, "both the Philly and N.Y. Fed reports show[ed] improving manufacturing and business conditions." (Reuters, April 15)
• As for the U.S. housing market, it officially entered the "double-dip recession" zone only on May 31, a month after the Dow's April 29 peak. 

This is not to say that unemployment, manufacturing and real estate were peachy in April. But the worst of the reports from those areas of the economy only came after the stock market had already entered the decline. The most recent weak economic reports hardly explain why stocks topped when they did.
If you're looking for a better explanation, consider an Elliott wave perspective: The economy doesn't lead the stock market -- it's the stock market that leads the economy.
Skeptical? Then think back to 2007. "Goldilocks economy," strong corporate earnings, unemployment at 4.4% -- nothing but blue skies ahead. The Dow rallies to an all-time high above 14,000 in October 2007 -- and over the next 18 months goes on its biggest losing streak in 70+ years, falling 54% and ushering in "the Great Recession."
Now fast forward to March 2009. The Dow has crashed below 6,500; unemployment has more than doubled; the desperate Fed has dropped interest rates to 0%; foreclosures; bailouts; consumer confidence at an all-time low; general state of near-panic. The Dow bottoms on March 6, 2009, and stages a powerful two-year rally above 12,000.
By conventional logic, you'd have to agree that, paradoxically, "the good economy" of 2007 prompted the deflationary crash, while "the bad economy" of 2009 sent stocks flying.
But here's an explanation that actually makes sense: Broad market trends are not created by the economic conditions -- social mood is what creates them. Social mood doesn't depend on what Ben Bernanke had for breakfast -- it changes for endogenous reasons, and those changes follow the Elliott wave model. Stocks lead the economy because they are quicker to register changes in social mood.

Before you make investment decisions based on the latest economic report, be sure to read the 2011 edition of The Independent Investor eBookby Elliott Wave International. You will see example after example of the fallacy to the belief that economic conditions direct the moves in the stock market.  Download your free 50-page Independent Investor eBook now.