Sentiment Speaks: Can We Get To 5500SPX In 2022? But 4440SPX Comes First

Before you begin reading this article, I want to warn you that it is quite lengthy and also recaps some of our analysis over the past 20 months. So, if this will offend you or you don't want to hear that, feel free to stop reading right now.

I have been writing for Seeking Alpha now for over a decade. And, during that time, I certainly have had my share of critics. I have been told that I do not understand the markets I track. I have been called names like "insane," "dimwit," "charlatan," and "snake oil salesman." And, I have been told that my "squiggly line" analysis cannot foretell anything, is "absurd," "chart magic," and "highly unmeaningful."

And, these are just some of the comments I received over the last 20 months alone, as you can see for yourself:

Are You As Foolish As Most Market Participants?

So, it has certainly been an interesting past 20 months, in addition to the last decade.

Yet, we have caught just about all the major turns in the markets we track during the last decade. Moreover, we have grown to 64,000 followers with one of the highest follower-to-article ratios on all of Seeking Alpha, we have grown to over 7500 subscribers to our services, and have almost 1000 money manager clients. In fact, two of the three services we provide on Seeking Alpha are ranked within the top 8, with the 3rd ranking at 16, out of a total of 187 services offered in the SA Marketplace.

And, when you consider that we attained this success on a platform that is focused primarily upon fundamental analysis, it would suggest that people are coming to us for the accuracy of our analysis first and foremost. There is no other way to explain how an Elliott Wave analysis service can rank that high on a fundamental analysis platform.

Interestingly, someone recently pointed out to me that a sub-culture has developed within the comments section of my articles. It seems that there is about a dozen people who despise my work, and "like" every negative comment that is posted on my articles each week. While they remain generally silent when my analysis is on the money, they still display their dislike of my articles in a very passive aggressive manner. But, I simply wonder why they come back to my articles week after week if they perceive me as being such a poor analyst. Yet, when they believe that I have missed a market call, they then become loud and boisterous. Interestingly, we have not heard from them very often, as our analysis has been extremely accurate for years. (smile)

But, I think it simply suggests that people dislike that which they cannot understand.

Now, I know my methods are not simple. I know my methods may seem quite complex to most, almost seeming like "chart magic." And, I know my analysis is often quite contrarian to the common views in the market. In fact, some have gone so far as to regard my methods as akin to voodoo. But, consider how accurate we have been through the years, and it has to at least make you recognize that there is a solid and consistent methodology that we apply.

But, what is the other side of the coin in market analysis? Well, consider how many articles or comments to articles that you have read over the last year that were explaining to you how inflation is going to kill the stock market. In fact, many have been proudly assuring us for a long time that inflation was going to kill the market:

My claim for the past year has been that inflation will rise so high and so long that eventually it will kill the stock market bull . . . As I've said, a crash will happen in both stocks and bonds due to this period of inflation that is not about to let up. I don't know how long that will take.

Well, these carnival barkers will continue to proclaim the crash is coming week after week. But, let's face it folks. We all know the bull market will come to an end. Is that really news? Do you really need someone to tell you that "the market is going to top, but I just don't know when?" And, is it really helpful to claim that a bull market is ending or a crash will happen for the past year, as the market has rallied over 1000 points during that time?

In fact, the stock market started 2021 at 3750, and has exceeded 4700 SPX this year. So, if a 25% return in one year is considered "killing" the stock market, I would pray for inflation to similarly continue to strike this market dead for many years to come. But, alas, I don't think fortune with thusly smile upon us.

Furthermore, many people believed that the Fed's tapering was going to kill this bull market as well. We all know the common belief about this perspective, so let's not try to deny it, as many market participants were quite certain about this result too:

My next . . . [p]ost will be about how the Fed's taper will hit the stock and bond markets right in their blind side with devastating consequences.

So, what happened when the Fed announced its intentions to taper at its last meeting? Were you all blind-sided by the "devastating consequences?"

Rather, the market began to rally strongly right after the announcement of the Fed's tapering. That rally was quite devastating indeed. . . well, maybe to the bears who expected the exact opposite reaction. It was almost comical to read the mental gymnastics performed by the pundits as they tried to explain why the market rallied after the Fed tapering announcement.

It would seem that the alternatives in analysis certainly make my "chart magic" look good. (smile)

Much of the ignorance being peddled is due to believing that the stock market is led by the economy. Yet, nothing could be further from the truth. And, all you have to do is think a bit deeper about how markets work to understand this. While I have tried to explain this in many past writings, I think it needs to be stated again.

During his tenure as chairman of the Federal Reserve, Alan Greenspan testified many times before various committees of Congress. In front of the Joint Economic Committee, Greenspan noted that markets are driven by "human psychology" and "waves of optimism and pessimism." In fact, he provided us his insight as to when declines complete when he noted that "[i]t's only when the markets are perceived to have exhausted themselves on the downside that they turn."

In fact, Greenspan went so far as to note, "I always believed in animal spirits. It's not their existence that is new. It's the fact that they are not random events, but actually replicate in-bred qualities of human nature which create those animal spirits."

And, what may be most surprising to many, Mr. Greenspan even declared, "[I]t hardly makes any difference who will be the next president. The world is governed by market forces."

Ultimately, as Greenspan correctly recognized, it is social mood and sentiment that moves markets. I believe this makes much more sense when deriving the causality chain for market movement.

During a negative sentiment trend, the market declines, and the news seems to get worse and worse. Once the negative sentiment has run its course after reaching an extreme level, and it's time for sentiment to change direction, the general public then becomes subconsciously more positive. You see, once you hit a wall, it becomes clear it is time to look in another direction. Some may question how sentiment simply turns on its own at an extreme, and I will explain to you that many studies have been published to explain how it occurs naturally within the limbic system within our brains, which subconsciously overrides our neo-cortex.

Again, as Greenspan not, "[i]t's only when the markets are perceived to have exhausted themselves on the downside that they turn."

When people begin to subconsciously turn positive about their future (which, again, is a subconscious - and not conscious - reaction within their limbic system, as has been proven by many recent market studies), they are willing to take risks. What is the most immediate way that the public can act on this return to positive sentiment? The easiest and most immediate way is to buy stocks. For this reason, we see the stock market lead in the opposite direction before the economy and fundamentals have turned.

In fact, historically, we know that the stock market is a leading indicator for the economy, as the market has always turned well before the economy does. This is why R.N. Elliott, whose work led to Elliott Wave theory, believed that the stock market is the best barometer of public sentiment.

The most recent example of this is when the SPX bottomed at 2200SPX, and began a rise that has more than doubled in price despite initially starting its rally during the worst news of Covid deaths, record high unemployment, and economic shutdowns being reported during the heart of the rally off the low, and continuing the strong rally despite supposedly high inflation and supply chain disruptions.

In fact, economists viewed us as being in a recession during the rally from 2200 all the way to 3500SPX! Do you see what I mean?

Let's look at the same change in positive sentiment and what it takes to have an effect on the fundamentals. When the general public's sentiment turns positive, this is the point at which they are willing to take more risks based on their subconscious positive feelings about the future. Whereas investors immediately place money to work in the stock market, thereby having an immediate effect upon stock prices, business owners and entrepreneurs seek out loans to build or expand a business, and those take time to secure.

They then put the newly acquired funds to work in their business by hiring more people or buying additional equipment, and this takes more time. With this new capacity, they are then able to provide more goods and services to the public and, ultimately, profits and earnings begin to grow - after more time has passed.

When the news of such improved earnings finally hits the market, most market participants have already seen the stock of the company move up strongly because investors effectuated their positive sentiment by buying stock well before evidence of positive fundamentals is evident within the market. This is why so many believe that stock prices present a discounted valuation of future earnings.

Clearly, there is a significant lag between a positive turn in public sentiment and the resulting positive change in the underlying fundamentals of a stock or the economy, especially relative to the more immediate stock-buying activity that comes from the same causative underlying sentiment change.

This is why I claim that fundamentals are a lagging indicator relative to market sentiment. This lag is a much more plausible reason as to why the stock market is a leading indicator, as opposed to some form of investor omniscience. This also provides a plausible reason as to why earnings lag stock prices, as earnings are the last segment in the chain of positive-mood effects on a business-growth cycle.

It is also why those analysts who attempt to predict stock prices based on earnings fail so miserably at market turns. By the time earnings are affected by a change in social mood, the social mood trend has already changed for some time. And this is why economists fail as well - the social mood has shifted well before they see evidence of it in their "indicators."

Now, those that argue otherwise will try to provide some basis for their perspective, which is often specious at best. Yet, not a single person has been able to show me where my perspective about the causation chain outlined above is wrong. But, this is exactly how it happens in the real world, whereas the world of economics is purely theoretical and often misses the mark at major turns. Again, consider that we were viewed as being in a recession while the market rocketed up from 2200 to 3500SPX.

But, those following our work know quite well how we turned bullish at 2200SPX. And, when we did, boy did we take a beating in the comment section, as I posted earlier:

Are You As Foolish As Most Market Participants?

But, at the bottom, we explained that we expected a rally to begin to take us to at least 4000SPX, with an ideal target in the 6000SPX region. And, we confidently stated this even though the fear we experienced at the bottom in March 2020 was likely greater than the fear we experienced at the bottom of the market in March 2009. Moreover, even though the market rallied from 2200-3750SPX in 2020 (70%), as we came into 2021, we outlined our expectation for a continuation rally of at least 20%, with a minimum target of 4600SPX.

Most specifically, I called for a rally in 2021 to initially take us to the 4440-4600SPX region, to be followed by a 200-300 point pullback (with an ideal pullback target of 4270SPX), to be followed by a rally to 4900SPX. And, the market has obliged in almost perfect fashion. Moreover, the reason we were able to glean such accurate expectations about our forward views on market direction is due to our understanding of market sentiment.

As we stand today, we have struck a high in the 4700SPX region. So, I think it is time for me to begin to prepare you for my expectations for 2022.

First, I want to remind you that I have found no other analysis methodology which provides market context as does Elliott Wave analysis. Again, it allowed us to call for a major bottom at 2200SPX, to be followed by a rally to at least 4000SPX with an ideal target of 6000 even before we bottomed in March of 2020. It allowed us to call for a 20%+ continuation rally in 2021 even though the market had already rallied 70% off the lows in 2020. It allowed us to call for a rally to 4600SPX to be followed by a pullback of 200-300 points (with an ideal pullback target of 4270SPX), to be followed by a rally through 4600SPX with an ideal target in the 4900SPX region.

So, as we are approaching our next target region in the 4900SPX region, our Fibonacci Pinball method of Elliott Wave analysis suggests that we can top out in the 4900SPX region, and then see the largest pullback we have experienced since we bottomed in March 2020. In fact, I have an ideal target for a pullback in the 4440-4485SPX region, likely to be seen in the first quarter of 2022. That means that I am expecting an 8-10% pullback once we complete this current rally in the 4900SPX region.

Now, I am going to make a prediction. I predict that there will be almost ubiquitous certainty that the bull market has ended as we approach the conclusion of that pullback. But, it will likely be far from the end of the bull market. Rather, that pullback will re-set sentiment to the extent that I can call for a minimum rally in 2022 from the pullback low to at least the 5163SPX region, with strong potential to rally as high as 5500SPX in 2022.

Yes, I know this sounds almost unbelievable. But, does it sound as unbelievable as calling for 4000+ before we even bottomed at 2200SPX? Does it sound as unbelievable as calling for a continuation rally of 20%+ even after we just completed a 70% rally in the 9 months prior? Well, to be honest with you, I do not provide analysis to satisfy your expectations or views about what is reasonable in the market. I provide my analysis based upon what the math tells me.

So, if you would like to learn the details as to how our mathematically based analysis of market sentiment is able to glean such accurate predictions from market structure, you can feel free to join ElliottWaveTrader.net for a free trial. We are very happy to teach our methods to you. And as our members have said to us thousands of times, once you learn what we have to teach, you will have wished you had joined sooner, as it will certainly change the way you view markets forever.

In fact, on Wednesday, one of our money manager clients sent us the following note:

"I have been a member for about 19 months and I just want to say thank you for the work you and your team does. This service has changed my entire perspective on the markets in a positive way. Some context, I am Chief Investment Officer of a boutique Wealth Management firm with approximately 1.5B in AUM, so your knowledge and expertise touches everyone of our clients, and for that I am extremely thankful. Thank you again!"

Avi Gilburt is a widely followed Elliott Wave analyst and founder of ElliottWaveTrader.net, a live trading room featuring his analysis on the S&P 500, precious metals, oil & USD, plus a team of analysts covering a range of other markets.

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