January 27, 2022 Update
M&As: Beware of This Major Sign of a Stock Market Top
Here’s what often precedes “prolonged and devastating bear markets”
Inside the three publications that comprise Elliott Wave International’s flagship Financial Forecast Service, Elliott Wave International recently documented the many expressions of “financial optimism.” Things like crypto mania. Or meme stocks. Or just buying any stocks, all stocks, no matter if the companies that issued them are making money, losing it, or have yet to turn a profit.
And it’s more than just the individual investors who are caught up in it. Among the other behaviors this widespread financial optimism leads to are corporate mergers and acquisitions.
A corporate merger here or there may have little significance. However, when the biggest one in history occurs as part of a trend of a rising number of M&As — beware.
Consider a historical case-in-point: This is from the February 2000 Elliott Wave Financial Forecast, a monthly publication which provides analysis of major U.S. financial markets:
The euphoria surrounding AOL’s purchase of Time Warner may mark the top. As The Wall Street Journal put it, “The deal was heavy with superlatives and symbolism. It would be the biggest merger in history yahoo!”
That purchase had occurred about a month earlier [Jan. 10, 2000], which was within days of the Dow’s high.
As Robert Prechter’s At the Crest of the Tidal Wave noted:
Companies express optimism by taking over other companies. Such activity is indicative not of minor bull market tops, but of ones that precede prolonged and devastating bear markets.
That optimism was again evidenced for much of 2007. In January of that year, the Elliott Wave Financial Forecast again issued a cautionary note:
The other incredible expanding story is the “staggering” size and volume of corporate acquisitions. Newsweek and countless other articles find the rash of “bigger and bigger” deals “Phenomenally Positive” for the stock market.
Instead, later in 2007, the stock market hit another historic top.
This brief review of 2000 and 2007 is relevant in these early days of 2022. Here’s a Jan. 18 headline (CNBC):
Microsoft sets record for biggest tech deal ever, topping Dell-EMC merger in 2016
The headline is referencing Microsoft’s purchase of Activision Blizzard.
Ironically, this is unfolding as technology stocks are being punished.
Could this purchase by Microsoft be a sign of another stock market top?
Of course, only time will tell.
One thing’s for sure: the Elliott wave model is sending a major message which every investor should know.
If you’d like to learn about the Wave Principle, the definitive text on the subject is Frost & Prechter’s Elliott Wave Principle: Key to Market Behavior.
Here’s a quote from this Wall Street classic:
The Wave Principle often indicates in advance the relative magnitude of the next period of market progress or regress. Living in harmony with those trends can make the difference between success and failure in financial affairs.
Good news: You can read the entire online version of the book for free.
All that’s required for free access is a Club EWI membership. Club EWI is the world’s largest Elliott wave educational community, and membership is free. Moreover, Club EWI members enjoy free access to a wealth of Elliott wave resources on financial markets, trading and investing.
Just follow this link for free and unlimited access to Elliott Wave Principle: Key to Market Behavior.
Next Time You See “4 Times as Many Bulls as There Are Bears,” Remember This
See how stock investors’ “historic optimism” served as a warning
After a 12-year uptrend, just when caution might be in order, investor psychology has remained highly and stubbornly optimistic.
As the July Elliott Wave Financial Forecast, a monthly publication which provides Elliott wave analysis of major U.S. financial markets, said:
Large traders are more exuberant than ever. On June 11, large trader buy-to-open call purchases jumped to 45%, a new record.
A highly bullish outlook was also expressed in this July 10 Marketwatch headline:
The bull market in stocks may last up to five years — here are six reasons why
Notice that the headline’s suggestion is that the bull market has just started.
That five-year forecast might turn out to be correct — but then again, keep this in mind from an earlier 2021 Financial Forecast:
A top never feels like a top. The bigger they are, the more permanent they seem.
And here’s yet another recent look at sentiment via a chart and commentary from the July 14 U.S. Short Term Update, a thrice weekly Elliott Wave International publication which provides near-term analysis of key U.S. financial markets:
The most recent result of the weekly Investors Intelligence Advisors’ Survey (InvestorsIntelligence.com) shows that the percentage of bulls rose to 61.2%. … With the percentage of bears dropping to just 15.3%, there are now four times as many bulls as there are bears. Since the stock market crash of 1987, a span of a Fibonacci 34 years, only 1.5% of the total weekly readings in the II bull/bear ratio have been higher than the 4-to-1 ratio of this past week.
Interestingly, just two days after this analysis published, the Dow Industrials dropped nearly 300 points on Friday (July 16) and on the following Monday, as of this writing, the Dow has tumbled more than 900 points.
To stay independent from the sentiment of the crowd, it’s a good idea to employ Elliott wave analysis and other technical indicators. They will help you stay on track — objectively, independently from the “bullish” news that inevitably fools the crowd.
If you’d like to learn about Elliott wave analysis, or need to brush up on the subject, there’s great news: You can access the online version of Frost & Prechter’s Elliott Wave Principle: Key to Market Behavior — 100% free.
All that’s required for free access to the book is a Club EWI membership. You can join this Elliott wave educational community for free, and membership allows you free access to a wealth of Elliott wave resources on financial markets, investing and trading.
Getting back to the book, here’s a paragraph from the first page of Chapter 1:
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. He called this phenomenon The Wave Principle.
Get more insights by following this link: Elliott Wave Principle: Key to Market Behavior — free access.
August 21 Update:
Stocks: What to Make of Wall Street’s Sky-High Optimism
“I believe that the market moves in whatever direction hurts the most participants”
The U.S. stock market has been in an uptrend since March 2009 — so, more than 12 years.
To add icing to the cake, there’s this notable factoid (CNBC, August 16):
S&P 500 doubles from its pandemic bottom, marking the fastest bull market rally since WWII
So, after such a historic run, one might think that many Wall Street analysts would say that it’s time to take at least some chips off the table.
Well, not so. Look at this astounding August 14 Bloomberg news item:
Wall Street Is the Most Bullish on Stocks in Almost Two Decades
So, what should one make of this uniformity of thinking and historic bullishness among Wall Street analysts?
Let’s turn to Robert Prechter’s landmark book, The Socionomic Theory of Finance:
Consensus regarding the future course of financial-market prices has an awesome power to become ossified in the wrong direction at markets’ major turning points.
The dictionary defines “ossified” as “having become rigid or fixed in attitude or position.”
That’s the very attitude that prompted Dave Lutz, head of ETFs at JonesTrading Annapolis to say:
“I’m a believer that the market moves in whatever direction hurts the most participants. If all the analysts on the Street are bullish, I’d be very cautious.”
That quote is from the same Bloomberg news item mentioned a moment ago, and Elliott Wave International agrees with that view.
After all, history shows that most investors, including professionals, are “surprised” at major turning points in the stock market.
The same patterns of investor psychology have played out time and again. Elliott waves are a direct reflection of these patterns.
Here’s what’s important to know:
The Wave Principle is governed by man’s social nature, and since he has such a nature, its expression generates forms. As the forms are repetitive, they have predictive value.
That’s a quote from Frost & Prechter’s Wall Street classic, Elliott Wave Principle: Key to Market Behavior.
You can get the details of how the Wave Principle helps investors to forecast the price paths of financial markets by reading the online version of the book — 100% free!
All that’s required for free access is a Club EWI membership, which is also free.
In case you’re unfamiliar with Club EWI, it’s the world largest Elliott wave educational community. Members enjoy complimentary access to a wealth of Elliott wave resources on financial markets, investing and trading.
You can have the book on your computer screen in just a few minutes by following this link: Elliott Wave Principle: Key to Market Behavior — free and unlimited access.