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As demonstrated in our previous article about the S&P 500, the stock market started climbing while the economy looked the weakest. Then, as the markets kept rising, a new conundrum occurred. How to explain the extremely wide disconnect between the stock market and the economy?
GDP forecasts for Q2 are all over the map, ranging from -30% to -53% decline. Unemployment for the month of May was expected to reach levels last seen in the Great Depression of the early 1930s. Yet, the market just kept going higher and higher.
On Friday, May 15th, the S&P 500 closed at 2864, but most analysts thought it was just a matter of time before it revisits the March lows. After all, how can the market rise when the economy is in such a bad shape, right? Except that experienced investors know that the habit of the market is to anticipate, not to follow.
Staying Ahead of the S&P 500 Surge Amid the Deepest GDP Dive on Record
So instead of looking at the economy in the rear-view mirror, we decided to look for Elliott Wave patterns with predictive value. It didn’t take a lot of time to find one. Before the open on Monday, May 18th, we sent the chart below to subscribers.
The hourly chart of the S&P 500 revealed a textbook 5-3 wave cycle to the upside. A five-wave impulse, labeled 1-2-3-4-5, was followed by a shallow but clear a-b-c zigzag correction. According to the theory, it was time for another rally.
Three weeks ago, the economic output of the United States was (and still is) expected to be cut roughly in half in Q2. The unemployment rate was predicted to approach or even exceed 20%. Yet, the stock market was sending a very bullish message through its Elliott Wave patterns. This is what happened next:
In the three weeks that followed the S&P 500 index surged by 12%. On Friday, June 5th, it touched an intraday high of 3212. The May unemployment rate came in better than feared, but as usual, waiting for the good news to arrive meant paying a higher price to get in.
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