True or False: Inflation = Stock Market Sell-off?

May 20, 2021

Before you answer, recognize that the “market has a law of its own”

By Elliott Wave International

The topic of inflation has been grabbing a lot of financial headlines.

Indeed, financial journalists have “blamed” inflation for recent stock market sell-offs.

On May 11, when the Dow Industrials closed 475 points lower, an intraday headline said (Reuters):

Wall Street drops on inflation jitters, led by tech stocks

The next day, on March 12, the sell-off persisted. Another financial news source noted (CNBC):

Dow tumbles 680 points in worst decline since January as hot inflation reading spooks investors

Free Reports:

Sign Up for Our Stock Market Newsletter – Get updated on News, Charts & Rankings of Public Companies when you join our Stocks Newsletter

Get our Weekly Commitment of Traders Reports - See where the biggest traders (Hedge Funds and Commercial Hedgers) are positioned in the futures markets on a weekly basis.

So, at least two news organizations agree that inflation was the culprit behind the sell-offs.

However, investors who follow the news closely may have done a little head scratching. Meaning — at the start of the same week (May 10) — the Dow climbed to a record high. So, were inflation worries absent on that day? Not according to this May 10 headline (CNBC):

Americans fear highest inflation in nearly a decade

So, same inflation worries, but the Dow went up instead of down.

And, sticking with the same week, the Dow climbed more than 400 points on May 13 and turned in another triple-digit gain on the 14th.

So, to sum it up, during a five-day stretch, the Dow closed higher three times and lower twice.

Does it make sense that investors only paid attention to inflation concerns on a Tuesday and Wednesday, but not on a Monday, Thursday and Friday during the same week? Hardly.

As Frost & Prechter’s Wall Street classic, Elliott Wave Principle: Key to Market Behavior, says:

Sometimes the market appears to reflect outside conditions and events, but at other times it is entirely detached from what most people assume are causal conditions. The reason is that the market has a law of its own. It is not propelled by the external causality to which one becomes accustomed in the everyday experiences of life. The path of prices is not a product of news.

Well, if news and events don’t drive market prices, what does? The answer is the Wave Principle. Let’s return to the book:

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.

Specifically, a financial market trend takes the form of five waves. After those five waves have unfolded, a new trend in the opposite direction is set to start.

Get more information on how the Wave Principle can help you analyze the stock market so you can prepare for what’s ahead.

You can do so by reading the online version of Elliott Wave Principle: Key to Market 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 members are granted free access to a wealth of Elliott wave resources on financial markets, investing and trading.

Let’s wrap up with another quote from Elliott Wave Principle: Key to Market Behavior:

After you have acquired an Elliott “touch,” it will be forever with you, just as a child who learns to ride a bicycle never forgets. Thereafter, catching a turn becomes a fairly common experience and not really too difficult.

Are you ready to give Elliott wave analysis a try?

Here’s the link to follow for free access to the online version of this Wall Street classic: Elliott Wave Principle: Key to Market Behavior.

This article was syndicated by Elliott Wave International and was originally published under the headline True or False: Inflation = Stock Market Sell-off?. 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.