Beware Of Delusional Market Timers

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Preface from Tim: Below is an item contributed from Avi, which obviously is in sharp contrast to my own point-of-view. I’m glad he wrote this, though, because it saved me some time in doing a post I was going to construct called “Elliott Wave’s Last Chance”. I will summarize what the post was supposed to be about………

Our friends in Gainesville were hyper-bearish from 2009 until sometime last year. Back in 2009, they stated that the S&P might claw its way back to 1000 or so, but then it was going to be plunging back beneath the 666 low. As most of you realize, this never happened. Year after year, though, the crash was always around the corner.

At some point – – I’m not sure when, but I think within the past year or so – – they massively changed their tune (and their wave count). Their current position is that LIFETIME highs are still forthcoming, pushing even past what we saw earlier this year. Avi seems to agree.

As a newcomer to EW around 2008, I thought I had tripped across the holy grail, and, for obvious reasons, my opinion has changed since then. If the market does NOT push to new highs, and if instead we saw the highs already (and our friends in Gainesville once again change their “count” to accommodate this reality), then you can expect the Snarkiest Post Ever Written by me. Anyway, the jury is still out, so here we go…………..

By Avi Gilburt,

This past week has seen a lot of whipsaw. But, from an Elliottician’s perspective, it was to be expected, as the market has been tracing out a b-wave within a corrective 4th wave structure. This is the most variable segment within Elliott’s 5 wave structure, and typically acts just as we have seen over the last few weeks.

As the stock market hits heights which have surprised most market participants, we have seen many market participants maintain a bearish bias through most of the rise because the “fundamentals suggest the market should not be this high.”

They review data published by research firms supporting their thesis based upon earnings, money flow, margin debt, GDP, and a myriad other “reasons” as to why the market should not be this high. They have developed a certain amount of comfort in “knowing” that they are not wrong, but, rather, it’s the stock market which is wrong, despite the market continuing its march higher. Moreover, they take further comfort in their belief that other investment advisors share their bearish perspectives.

But, as Jesse Livermore would say, “A prudent speculator never argues with the tape. Markets are never wrong, opinions often are.”

However, they still maintain their bearish eye towards the market, as it is the “reasonable” thing to do, because “it will all turn out very, very badly.” But, do not fret, as they will eventually be proven right within “5,10 years from now.”

And based upon such “logic,” we will all die in the end so let’s just give up right now. I mean, claiming that “it will all turn out very, very badly” within 5-10 years is not exactly analysis by which one can invest.

Of course, the market is going to strike a long-term top. I mean, “duh.” But, should we run and hide our money because it is going to happen in the future? Many of these analysts have been claiming the “crash is upon us” for years, and the only thing they have certainly proven is that THEY cannot tell you when it will happen. So, they simply malign anyone else that does not believe as they do through name calling. As some of them put it, everyone who does not see the market as they do is simply “delusional” and “wrong,” even those that expected the market to reach these heights.

I have written in the past many times about these types of investors and analysts. Moreover, I have written in the past about why such bearishness sells among the masses.

For example, in my Seeking Alpha article from Jul 24, 2016,  I noted how Roy F. Baumeister, a professor of social psychology at Florida State University, captured the sentiment of this discussion in the title of a journal article he co-authored in 2001, “Bad Is Stronger Than Good,” which appeared in The Review of General Psychology.

In that article, he explained that those who are “more attuned to bad things would have been more likely to survive threats and, consequently, would have increased the probability of passing along their genes … Survival requires urgent attention to possible bad outcomes but less urgent with regard to good ones.”

This seems to cause man to become hyper-focused on the negative, which is driven by his innate desire to survive. Furthermore, when we consider that fear is the strongest emotion generated by our brain stem, we can develop a negativity loop that drives us to continually focus upon the negative by our strongest natural tendencies.

Now, we have a better understanding as to why fear or bearishness sells. Our innate tendencies seem to drive us in that direction, despite all the empirical data to the contrary. While our innate tendencies seem to have been pre-programmed within our brain stems to assist man to survive in a life and death struggle, I am not sure such hyper-focused tendencies help us in all aspects of our current lives in which we clearly allow them to reign.

It certainly does not help those who are seeking to profit from both sides of the stock market. In fact, being so hyper-focused on the negative will always have you either missing out on a stock market rally, or, worse yet, shorting one. It is for this reason that we recognize that contrarian thinking is much preferred to “group think” when dealing with financial markets.

So, when I read analysts who, week after week, spew the same bearishness, but with different reasons, it tells me that biology certainly maintains strong control over decision making even for analysts.

Now, some of these bearish analysts even consider me as “delusional” for believing (and proving) that one can time the markets from a probabilistic perspective. While they have maintained their bearish “crash” bias since 2015, the market has moved in an almost perfect wave pattern, which has been pointing to 2537-2611 for us.

As you can see from the Seeking Alpha article as well as this chart of our 2016 calls, the market has moved in an almost text-book fashion over the last several years. Yet, most non-believers simply chalk it up to luck, because, of course, it simply could not happen the way our analysis has suggested. It is simply impossible to be able to prognosticate the market to this extent. We must be delusional to try, right?

Well, once the market struck our 2300 target region at the end of 2016, and then consolidated, we then traversed to our next target in the 2410-2440SPX region. And, as we spiked up to the 2400 level on March 1, we told the members in our Trading Room at that it’s time to prepare for a pullback/consolidation. So, again, the market has complied with the expectations of the “delusional.”


But, one has to wonder who the truly delusional are in this market. Is it the ones who recognize the trend, and understand how markets progress and regress, or the ones who have been on the sidelines for years, muttering to themselves “this just can’t be?”

As I have presented so many times before, the stock market is driven by emotion. This is why Keynes recognized that the market can remain irrational longer than shorts can remain solvent. He recognized that emotion is what drives the market, rather than reason. So, continuing to pour over the same data, news, earnings or events (as does the great majority that believe “the market is wrong”) will not assist you in garnering the gains you desire when you invest.

I have quoted Dr. Hernan Cortes Douglas many times in articles over the years, and I believe it still needs repeating:

In a paper written by Professor Hernan Cortes Douglas, former Luksic Scholar at Harvard University, former Deputy Research Administrator at the World Bank, and former Senior Economist at the IMF, he noted the following regarding those engaged in “fundamental” analysis for predictive purposes:

“The historical data says that they cannot succeed; financial markets never collapse when things look bad. In fact, quite the contrary is true. Before contractions begin, macroeconomic flows always look fine. That is why the vast majority of economists always proclaim the economy to be in excellent health just before it swoons. Despite these failures, indeed despite repeating almost precisely those failures, economists have continued to pore over the same macroeconomic fundamentals for clues to the future. If the conventional macroeconomic approach is useless even in retrospect, if it cannot explain or understand an outcome when we know what it is, has it a prayer of doing so when the goal is assessing the future?”

So, when you are presented with “analysis” which is based on various forms of widely published “data,” or an attempt to convince you that correlations are akin to causation, I suggest you view it with a healthy dose of skepticism, especially when the analyst goes on to “poo-poo” a 35% return in a year.

Remember, it is not hard to find bearish information about the stock market and present it to the masses as a definitive expectation. And, yes, it even builds a massive fan base, since everyone else is also biologically inclined towards bearishness, as noted above. So, if confirmation bias is what you seek, then by all means, continue following your biological imperatives by gobbling up all the bearish “data” you are fed, while your investment account suffers.

For the rest of you, I will meet you at the top.

Since the current structure of the market is within a 4th wave pullback/consolidation, the micro-structure is not something that is easily prognosticated. You see, understanding where we reside within the trend provides a significant amount of information in knowing when to be in or out of the market, but it will not always provide you with high probability structures to trade all the time. But, when we told our members at on March 1 to prepare for a pullback, the larger-degree structure of the market has been quite predictive of the nature of the market.

While this pullback/consolidation will likely see lower levels than where we currently reside, the larger degree structure is still pointing towards the 2500SPX region before an even larger consolidation/pullback takes hold later this year. But, one needs to use this pullback to set up for the next rally phase we expect.


In the micro structure, as long as we hold the 2330SPX region, then we can see another rally back up as high as 2410SPX. But, as long we remain below that resistance, the market will likely remain in a corrective state, and set us up for another drop to scare people out of the market. However, a break down below 2330SPX before a bigger rally is seen opens the door to completing this correction sooner rather than later, and can test lower support between 2285-2305SPX before the next 200 point rally begins.

So, in conclusion, due to the variable nature of 4th wave structures, I cannot be certain as to which path the market wants to take to complete this correction. But, I can say that we are likely setting up to attack the 2500SPX region later this year.