Stock Market’s Character Has Changed — Here’s How

We’re watching the VIX or “fear index” to see what’s next

By Elliott Wave International

Stock market investors naturally want to know the closing numbers for the main stock indexes at the end of each trading day.

Yet, it’s also good to dig deeper.

Let me show you some examples of how the U.S. Short Term Update, a thrice weekly Elliott Wave International publication which covers near-term trends of key U.S. financial markets, does just that.

Let’s start off with a quote from the Aug. 21 issue:

NYSE down volume outpaced up volume 52.7% to 47.3%. Internally, today’s rally in the S&P and NASDAQ was meek.

Here’s a review of a revealing indicator from the Aug. 16 U.S. Short Term Update:

The NYSE a/d ratio has closed negative or flat for seven straight days. It’s the longest streak in nearly a year, since August 26, 2022 to September 6, 2022. The 10-day NYSE a/d ratio closed yesterday (Aug. 15) at .80, which is the most negative also since September 2022.

Another observation of the market’s internal dynamics was mentioned by the Aug. 9 U.S. Short Term Update:

The VIX made a closing low on June 22 and failed to confirm the S&P’s higher price extremes. That was an initial warning sign that market participants were becoming a bit more fearful and expecting a pickup in market volatility.

So, it appears the character of the stock market has changed.

These negative indicators are in stark contrast to measures of stock market sentiment during the past several weeks, some of which reached bullish extremes.

For example, consider the Advisor and Investor Model (AIM) from SentimenTrader.com. That’s a blend of over 50 sentiment readings from five different sources, including Market Vane and Consensus Inc., two of the oldest services.

The August Elliott Wave Financial Forecast, a monthly publication which analyzes major U.S. financial markets, provides some insights:

This comprehensive model hit a new 3½-year extreme of 0.99 on July 25. The extreme during the topping process was a reading of 0.96 on April 16, 2021, which occurred as the most speculative issues completed their tops.

Indeed, as recently as Aug. 14, none other than Nasdaq.com had this headline:

Reasons to Still Believe In This New Bull Market

In Elliott Wave International’s view, the S&P 500 index never entered a “new bull market” since the January 2022 top and the subsequent downturn. Yes, there’s been a rally since that first leg down, but the January 2022 peak has not been breached.

The stock market’s Elliott wave structure puts that rally into context.

If you’d like to delve into the details of Elliott wave analysis, read Frost & Prechter’s book, Elliott Wave Principle: Key to Market Behavior. Here’s a quote from this Wall Street classic:

Although it is the best forecasting tool in existence, the Wave Principle is not primarily a forecasting tool; it is a detailed description of how markets behave. Nevertheless, that description does impart an immense amount of knowledge about the market’s position within the behavioral continuum and therefore about its probable ensuing path. The primary value of the Wave Principle is that it provides a context for market analysis. This context provides both a basis for disciplined thinking and a perspective on the market’s general position and outlook. At times, its accuracy in identifying, and even anticipating, changes in direction is almost unbelievable.

If you’d like to read the entire online version of the book, you may do so for free once you become a member of Club EWI, the world’s largest Elliott wave educational community.

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