Please Don’t Shoot The Messenger

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By Avi Gilburt,

In many of my articles, I have been attempting to enlighten those with open minds as to the true nature of the stock market. While most market participants have been trained to believe that the market is mechanically driven by exogenous causation, I have been providing historical and recent examples of why this simply is a market fallacy.

We have had some resounding real world examples over the last two years to poke some significant holes into the mechanical exogenous causation perspective. Remember back to the Charlie Hebdo attack in France, the Fed rate hike in December of 2015, the certain “crash” calls in February 2016, Brexit, Trump, the Fed rate hike in December 2016, etc. We have experienced many news “shocks” which were supposed to cause serious damage to the market over the last several years. Yet, the market was still able to provide us with a 600 point rally up to 2400SPX from February of last year, and this is all AFTER the Fed stopped QE.

Sentiment directs the market

I have also been showing you how markets are driven by the sentiment of the masses on all time frames, rather than by news, events, or fundamentals. Yet, the mechanical exogenous causation perspective is so deeply ingrained into the minds of investors, many attempt to “reason” that while sentiment may drive the market, news and fundamentals drive sentiment. Nothing can be further from the truth, as such a feedback loop would only cause the market to move in one direction. Moreover, if everyone admits that there are many times where the market is not aligned with the fundamentals, then it is clear this “reasoning” must fail.

I have written many articles attempting to dispel readers of this notion, but many remain quite intractable in their beliefs in the market fallacies surrounding mechanical exogenous causation. But, as R. N. Elliott said back in the 1930’s:

“At best, the news is the tardy recognition of forces that have already been at work for some time and is startling only to those unaware of the trend….kings have been assassinated, there have been wars, rumors of wars, booms, panics, bankruptcies, New Era, New Deal, “trust busting”, and all sorts of historic and emotional developments. Yet all bull markets acted in the same way, and likewise all bear markets evinced similar characteristics that controlled and measured the response of the market to any type of news as well as the extent and proportions of the component segments of the trend as a whole. These characteristics can be appraised and used to forecast future action of the market, regardless of the news….Those who regard news as the cause of market trends would probably have better luck gambling at race tracks than in relying on their ability to guess correctly the significance of outstanding news items….To sum up our view, then, the market essentially *is* the news.”

While many still hold fast to the old paradigm that fundamentals or news drive sentiment, I am constantly being asked if news does not drive sentiment, then what does?

What do the recent studies prove?

Social experiments have actually been conducted which resulted in price patterns that mirror those found in the stock market. In 1997, the Europhysics Letters published a study conducted by Caldarelli, Marsili and Zhang, in which subjects simulated trading currencies, however, there were no exogenous factors that were involved in potentially affecting the trading pattern. Their specific goal was to observe financial market psychology “in the absence of external factors.”

One of the noted findings was that the trading behavior of the participants were “very similar to that observed in the real economy,” wherein the price distributions were based on Phi (.618).

Their ultimate conclusion would surprise the most avid trader today:

In spite of the simplicity of our model and of the strategies of the single participants, and the outright exclusion of economic external factors, we find a market which behaves surprisingly realistically. These results suggest that a stock market can be considered as a self-organized critical system: The system reaches dynamically an equilibrium state characterized by fluctuations of any size, without the need of any parameter fine tuning or external driving.

Marsili was quoted as saying that “the understanding that we got is that the statistics of price histories in financial markets can be understood as the result of internal interaction and not the fundamental interaction with the external world.”

What this study proves is that one does not need exogenous causation to direct a market to act as financial markets normally do. So, even if you add in exogenous factors into the study, the results would remain the same. The reason I can confidently state this is because of other studies which support the fact that exogenous events, such as surprise news, have shown to have no effect upon the stock market.

In a 1988 study conducted by Cutler, Poterba, and Summers entitled “What Moves Stock Prices,” they reviewed stock market price action after major economic or other type of news (including major political events) in order to develop a model through which one would be able to predict market moves RETROSPECTIVELY. Yes, you heard me right. They were not even at the stage yet of developing a prospective prediction model.

However, the study concluded that “[m]acroeconomic news bearing on fundamental values explains only about one fifth of the movement in stock market prices.” In fact, they even noted that “many of the largest market movements in recent years have occurred on days when there were no major news events.” They also concluded that “[t]here is surprisingly small effect [from] big news [of] political developments . . . and international events.”

In August 1998, the Atlanta Journal-Constitution published an article by Tom Walker, who conducted his own study of 42 years’ worth of “surprise” news events and the stock market’s corresponding reactions. His conclusion, which will be surprising to most, was that it was exceptionally difficult to identify a connection between market trading and dramatic surprise news. Based upon Walker’s study and conclusions, even if you had the news beforehand, you would still not be able to determine the direction of the market only based upon such news.

In 2008, another study was conducted, in which they reviewed more than 90,000 news items relevant to hundreds of stocks over a two-year period. They concluded that large movements in the stocks were NOT linked to any news items:

“Most such jumps weren’t directly associated with any news at all, and most news items didn’t cause any jumps.”

I know this is very hard for most to accept, but more and more studies have proven that news does not effect the market as so many want to believe. Again, as Elliott stated over 80 years ago, “[a]t best, the news is the tardy recognition of forces that have already been at work for some time and is startling only to those unaware of the trend….”

You see, if you understand that social mood is what drives people’s actions, and those actions then cause results, and those results are then reported as news, it is not hard to understand what Elliott was trying to say over 80 years ago. This is exactly why news and fundamentals are always looking best at market highs, and worst at market lows. As Professor Hernan Cortes says:

“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.”

To take this a step further, consider a paper entitled, “Large Financial Crashes,” published in 1997 in Physica A., a publication of the European Physical Society. The authors, within their conclusions, present a nice summation for the overall herding phenomena within financial markets, which is not directed by exogenous causation:

Stock markets are fascinating structures with analogies to what is arguably the most complex dynamical system found in natural sciences, i.e., the human mind. Instead of the usual interpretation of the Efficient Market Hypothesis in which traders extract and incorporate consciously (by their action) all information contained in market prices, we propose that the market as a whole can exhibit an “emergent” behavior not shared by any of its constituents. In other words, we have in mind the process of the emergence of intelligent behavior at a macroscopic scale that individuals at the microscopic scales have no idea of. This process has been discussed in biology for instance in the animal populations such as ant colonies or in connection with the emergence of consciousness.

So, based upon much research, it does seem that the market may be considered to be on a path that is determined by a mass form of herding that is given direction by social mood, as directed through biological responses rather than mechanical exogenous causation.

It sure does explain the oft asked question of why markets go up when bad news is announced or vice versa. It also takes out all the guess work in attempting to determine the next “news event” that may move markets. And, it also explains why anyone following fundamentals is still scratching their head as the market continues to rally far beyond their expectations, while they continue to claim “the market is wrong.”

So, is it the market that is wrong, or our underlying thinking or beliefs?

Avi Gilburt is a widely followed Elliott Wave technical analyst and author of (, a live Trading Room featuring his intraday market analysis (including emini S&P 500, metals, oil, USD & VXX), interactive member-analyst forum, and detailed library of Elliott Wave education.