Here’s a Strong Indication That the Bear Market Has Legs

This is what investors look for at or near a stock market low

By Elliott Wave International

Elliott Wave International’s analysts have been observing financial markets for decades. They monitor dozens of stock market indicators, in addition to Elliott wave patterns.

No single indicator can tell the whole story of what’s going on with the market, but sometimes, a single observation can carry a lot of weight.

One current observation is that many investors are still looking for reasons to be bullish, even though stocks have been in a downtrend for more than a year. In other words, they think the bear market is over.

For example, the view of a prominent market researcher is unequivocal, according to this Jan. 11 headline (Bloomberg):

Bull Market Is Back as Recession Worries Fade, [Market Research Firm Founder] Says

In Elliott Wave International’s view, if recession concerns are dwindling, that’s a reason to be on the lookout for a recession — or, something worse.

But, setting aside whether a recession is pending or not, the point is the latching on to reasons why the bull market is back.

This Jan. 11 headline captures the view of a vice-chairman of a financial firm (CNBC):

The market is telling you that the economy’s not going to be as bad as expected: Financial services firm

Of course, this is close to the same message as the first headline.

Other headlines mention lower inflation as a reason for rising stock prices.

But, let’s get back to Elliott Wave International’s observations over the years. The Jan. 11 U.S. Short Term Update, a thrice weekly Elliott Wave International publication which provides near-term forecasts for major U.S. financial markets, noted:

Investors are still searching for rationalizations to buy, which is a strong sign that [the] bear market has yet to run its course. People do not look for reasons to buy at or near a low, they look for rationalizations to sell.

Consider the last major bear market from 2007 to 2009. On Feb. 23, 2009, the “reason” stated for the continuation of the then bear market was “uncertainty about the latest potential U.S. government action to shore up beleaguered banks.” As a headline said (Reuters):

Dow tumbles to 11-year low on fear about banks

Fears about a big drop in business in the technology sector was also mentioned as a catalyst for plummeting stock prices.

Well, 10 days after that headline published, the stock market bottomed.

Observations about investor rationalizations is just one sign that the bear market may not be over. There are others, including the Elliott wave patterns of the major U.S. stock indexes.

If you’re unfamiliar with Elliott wave analysis, or simply need a refresher, read Frost & Prechter’s Wall Street classic, Elliott Wave Principle: Key to Market Behavior. Here’s a quote from the book:

In markets, progress ultimately takes the form of five waves of a specific structure. Three of these waves, which are labeled 1, 3 and 5, actually effect the directional movement. They are separated by two countertrend interruptions, which are labeled 2 and 4. The two interruptions are apparently a requisite for overall directional movement to occur.

[R.N.] Elliott noted three consistent aspects of the five-wave form. They are: Wave 2 never moves beyond the start of wave 1; wave 3 is never the shortest wave; wave 4 never enters the price territory of wave 1.

If you’d like to learn more (or continue with your refresher if you’re already acquainted with the Wave Principle), here’s some good news: You can access the entire online version of the book for free once you become a member of Club EWI, the world’s largest Elliott wave educational community.

Club EWI is free to join, and members are under no obligations. At the same time, members enjoy complimentary access to a wealth of Elliott wave resources on financial markets and investing.

Get the ball rolling toward a Club EWI membership by following this link: Elliott Wave Principle: Key to Market Behavior — get free and instant access.