Many market observers believe that the catalyst for the next bear market will be a piece of extraordinarily bad news.
However, Elliott Wave International has shown time and again that the stock market’s price action is often “entirely detached from what most people assume are causal conditions.”
Examples of stocks rising when the news is bad — and falling when the news is good — are so numerous that a library shelf of books would be inadequate to show a fair representation of them. For the most recent vivid example, just think back to March 2020, when the first wave of the pandemic hit and shuttered the entire global economy — yet, stocks (around the world!) happily found a bottom and haven’t looked back since.
No, the stock market is governed by the psychology and behavior of investors themselves.
One of the noteworthy behaviors is investors’ use of margin debt.
Indeed, back in 1980, The Elliott Wave Theorist said:
[A] failure of margin debt to expand in an advancing market [can be] the ‘kiss of death’ to a bull trend.
With that in mind, consider this chart and commentary from the recently published September Elliott Wave Financial Forecast:
The arrows on the chart on the next page of the year-over-year change in New York Stock Exchange margin debt show that [The Theorist’s] statement has been true at three major market tops over the last 24 years: at the market top in August 1987 … the S&P’s March 2000 top … and at the October 2007 peak. As the latest arrow shows, a rapid expansion in margin debt has, once again, reversed trend.
Keep in mind that the stock market does not always decline after a year-over-year drop in margin debt. However, if the use of margin debt substantially falls just after reaching a record high, history does show that stock prices usually tumble thereafter.
That said, in June, margin debt reached a record high of $882 billion, which makes the July retreat of $37.7 billion especially significant.
The Elliott wave model pinpoints the patterns of investor psychology even more precisely.
As our September Financial Forecast said, the current unfolding Elliott wave of the Dow Industrials is “one for the ages.”
Get the details by following the link below.