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 eBook by
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.
This
article was syndicated by Elliott Wave International and
was originally published under the headline Six Straight Weeks of Decline Take DJIA Below 12,000: What Now?.
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.
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