Do Stock Market Fundamentals Matter Yet - Or Ever?

The market has finally followed through on the pullback we were expecting to the 2335 region from 2400 on the S&P 500 (SPX), as we have outlined. The structure of the market over the coming week will likely tell us when the next 200-point rally to 2500SPX takes hold.

This past week, I read an article by a writer that has been decidedly bearish the stock market for quite some time. In his latest missive, he reiterated his position that the stock market is disconnected from the fundamentals of real world dynamics. And, then I read another article stating outright that this market is dangerously overpriced.

They seem to be no different than most analysts today claiming that the market is not being driven by fundamentals at this time. And, yes, I simply love that statement. It just makes me chuckle every time I hear it. It is no different than saying that the steering wheel is not driving a remote-control car. Well, of course, it isn't. It never has.

As Jeff Miller appropriately summed it up in his recent update:  "Most pundits, media, "smart money," experts on valuation have been completely wrong for many years."

This situation also reminds me of one of Keynes's best lines: "Markets can stay irrational longer than you (the shorts) can stay solvent."

The problem is that most market participants and analysts view the stock market from a purely mechanical standpoint. The common belief is that if a certain event happens, then there must be a specific stock market reaction to that event. And, as we all know, this firm belief in "exogenous causation" (as termed by Robert Prechter in his latest work "The Socionomic Theory of Finance") is strongly held by almost all market participants. Here is an example of how a recent financial television show expressed its expectations based upon exogenous causation (mind you, this show has been wrong about every other major market move in the last two years based upon exogenous causation):

The problem is that market movement based upon exogenous causation is simply not true if you review market history, rather than hold fast to a commonly held market fallacy.

We have had some resounding real world examples over the last two years to poke some significant holes in the exogenous causation perspective. Remember back to the Charlie Hebdo attack in France, the Fed rate hike in December of 2015, the certain "crash" calls in February 2016, Brexit, Trump, the Fed rate hike in December 2016, etc. We have experienced many news "shocks" which were supposed to cause serious damage to the market over the last several years. Yet, the market was still able to provide us with a 600 point rally up to 2400SPX from February of last year, and this is all AFTER the Fed stopped QE.

In a 1988 study conducted by Cutler, Poterba, and Summers entitled "What Moves Stock Prices," they reviewed stock market price action after major economic or other type of news (including major political events) in order to develop a model through which one would be able to predict market moves RETROSPECTIVELY. Yes, you heard me right. They were not even at the stage yet of developing a prospective prediction model.

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Avi Gilburt is a widely followed Elliott Wave technical analyst and author of ElliottWaveTrader.net ( more

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Bill Johnson 2 years ago Member's comment

Good read, thanks.