Now that everyone is bullish again, here’s how we called the SP500 bottom back in September.
Do you remember what happened on Wall Street on October 13th, 2022? It was almost four months ago, which is distant past in the markets, so don’t worry if you don’t. Here is a reminder.
October 13th, 2022, was the day the CPI report for the month of September was released. And it was a complete disaster. The reading showed that consumer prices rose 0.4% in September, more than expected, and were up 8.2% from a year ago, despite the Fed’s aggressive rate hikes.
Stocks had been falling throughout 2022 mainly because investors feared that high inflation will force the Fed to raise rates, which in turn would drag the economy into a recession. So, it made sense to expect that another red-hot inflation report showing that all the rate hikes thus far were in vain, was going to cause another plunge in stock prices.
But it didn’t. Instead, October 13th turned out to be the day the market bottomed in 2022. Yesterday, February 2nd, 2023, the SP500 index closed at 4180, up 19.7% from the October low at 3492.
Financial media is usually very good at providing made-up reasons for price moves after-the-fact. In this case, however, even the journalists couldn’t make sense of the market’s reaction. Here is a quote by Bloomberg from that day:
“A shock turnaround in equities sent Wall Street searching for something — anything — to explain how yet another red-hot inflation number translated into one of the best days of the year.”
Financial news outlets have a strong incentive to convince people that it is news that moves asset prices up and down. Since they couldn’t find “something, anything” to explain the “shock turnaround” in stocks, they quickly moved on to other things. October 13th, 2022, was soon forgotten.
Fast-forward to today, the SP500 is on the verge of a 20% gain. 20% up/down is the official threshold Wall Street waits for before declaring that a new bull/bear market has begun. In addition, inflation is finally declining and both the Fed and the IMF now believe that the world economy might just avoid a recession after all. This means that after a 19.7% surge in the SP500, everyone is probably bullish by now. Well, almost everyone…
Michael Burry’s dramatic “Sell.” tweet on the day the SP500 added another 79 points only shows how unreliable it is to make market predictions based on economic data. 2023 has been very generous with investors so far, despite the recession doom and gloom and the Fed’s continued hawkish tone.
The good news is that investors don’t have to make such predictions to be successful. It is good to keep economic realities in mind, but when it comes to stocks, the market has its own rules. Here is how a combination of financial history and Elliott Wave analysis helped us predict both the SP500 ‘s October and December bullish reversals.
We shared the 4h chart above with our Elliott Wave PRO subscribers on September 28th, 2022. The SP500 was clearly in a bear market and still on its way down. Inflation was showing no signs of abating and there was no end in sight to the Fed’s interest rate increases.
On the other hand, bear markets are nothing more than big corrections. There are three types of corrective patterns in the Elliott Wave catalogue: flats, triangles and zigzags. The 2022 bear market looked nothing like a triangle. Given the guideline of alternation and the fact that the 2018-2020 correction was an expanding flat, we thought a zigzag retracement was in progress in 2022.
The decline from 4819 looked like a simple A-B-C zigzag, whose wave A was a leading diagonal and wave B was again an a-b-c zigzag. A leading diagonal wave A meant wave C cannot be an ending diagonal. So the only option was a regular five-wave impulse. In late-September, waves 4 and 5 were still missing so it made sense to expect a dip to ~3500. Once there, however, the correction would be complete. A notable bullish reversal was then supposed to occur. A mere two weeks later, that’s exactly what happened.
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The index rose to 3807 in wave 4 of C before wave 5 dragged it to 3492 on October 13th. Instead of accelerating to the downside on the back of the disappointing CPI report though, the price suddenly started rising. Two months later, in mid-December, the SP500 touched 4100.
That recovery resembled a five-wave impulse, labeled 1-2-3-4-5. The following drop to 3765 just before Christmas looked corrective. This meant that the bulls could still be relied on heading into 2023. Now, in early-February, 2023, we are happy to say that they didn’t disappoint.
This is how Elliott Wave analysis helped us correctly turn bullish on stocks, just when everyone else thought the worst was yet to come. But how could we rely solely on an Elliott Wave pattern, when the world economy seemed to be falling apart? A quote from our SP500 Elliott Wave PRO analysis explains it best:
“In 1942, the market bottomed three years before WWII was over. In 2009, stocks stopped falling long before the Great Recession was over. 2020, the SP500 started rising long before the Covid-19 pandemic was over. The market is a forward-looking creature. It doesn’t wait for newscasters to announce the end of a crisis, it anticipates it. Now, it seems it’s headed up again long before the end of the current inflationary crisis.”
To put it shortly, the market finds its bottom in the middle of a crisis, not after its end. The best investment opportunities present themselves precisely when all hope is lost and everyone is bearish. “Invest at the point of maximum pessimism”, Sir John Templeton famously said, and he couldn’t be more right.
Having said that, the recovery from 3492 has a three-wave structure already. It is make or break time for the SP500. Can it really evolve into an actual bull market? Or is it just a bear market rally about to fizzle out and make way for another big wave of selling? The Elliott Wave chart patterns are giving us a hint already and our subscribers know about it.
