Here's What Really Drives the Stock Market

The market rallied over 1% on Friday on a much worse than expected jobs report. And, I had a financial television show on in the background after the close, and I heard the host state the following after the rally made no sense to him:

“People ask me when it comes to Wall Street, are they in their own little world, their own little cocoon, that they see all these college protests, that they see all these other worries, and a former President on trial right now . . .”

As you can see, he and his followers were quite confused by the 1%+ rally on Friday. And, if you follow this type of news for your market expectation, then I have no difficulty in understanding such confusion. None of what the television show host noted actually matters to the market.

In the meantime, I will also let you know that the title to my analysis to subscribers on Thursday afternoon was “Looking For Another Rally,” and it was based upon what does matter to the market.

Now, I am quite sure that there are those that can spin the news on Friday to substantiate and attempt to explain the 1%+ rally on Friday. But, a reasonable person must come to the conclusion that such an explanation is akin to scratching your left ear by using your right hand and going over the top of your head.

Yet, no one who has been following the stock market over the last few years has been immune to the Bizzaro-world environment we have seen. The stock market bottomed in October 2022 on a much worse-than-expected CPI report, and has not looked back since. With everyone blaming rising interest rates for the market dropping 1300+ points off the early 2022 market high, the market has now seen an almost 1800-point rally off that low to make new all-time highs despite those higher interest rates.

So, if one were to appropriately question whether it was the interest rate at all causing our market action, then one would be quite flummoxed in their attempt to explain the last two years of market action. Yet, the analyst world was quite ubiquitous in their proclamation that interest rates are driving our market.

In my opinion, either they are outright liars, or are simply not burdened by the facts when they provide their “analysis.” I have to assume it is the latter case as the desire to conflate the current news to market action is simply too strong of an analytical driver that it causes most to throw out all manner of objective analysis or reasoning. So, we often see contorted market analysis in order to fit a square peg into the round hole.

The market action over the last year then led the analysts basing their prognostications upon interest rates to speculate that the rally we have seen since the October 2022 low was due to the Fed’s intention to lower rates. Yet, the market has rallied 1700+ points and there is no rate cut in sight.

So, what does the analysis world do? Of course, they modify their narrative to try to force that square peg into the round hole. So, now I read articles claiming that the Fed is not going to raise their rates and that will cause the market to go higher. Sigh. What happened to intellectual honesty? It seems to have died on the vine and no one even realizes it or maybe even cares.

As an investor, your job is to objectively understand the market in order to maintain on the correct side of the market action. Unfortunately, most investors follow specious market theories because it makes them feel as though they have a certain amount of control over the market if they can come up with a reason for the market move, no matter how contorted that reasoning may be. Yet, you must come to the conclusion that such control is an illusion, in the same way that much of the analysis leading to such false sense of control is intellectually dishonest.

As for me, I simply apply a mathematically-based approach to the market price action, which tells me rather objectively if my analysis is right or wrong and allows me to adjust rather quickly when I am wrong so that I am not adopting and trading false beliefs of the market.

In the meantime, I want to tell you that I am on high alert for a potential 25% reversal in the market to the downside. Now, before you get all excited, please recognize that I am not saying this move will certainly happen. I am simply saying that the market has now moved into an environment during which such a move can develop.

This is akin to when we recognize that the weather conditions are ripe for a tornado to develop. It does not mean that one will certainly occur, but we have to be aware of what to be looking for in order to recognize the need to head to shelter.

Back on March 11, I published an article entitled “Sentiment Speaks: It Is Time For A Serious Dose Of Caution.”

Within that article, I outlined the following:

“I am also seeing many analysts suggesting that the market has much higher to go. In fact, the one chart which has me extremely cautious – the Russell Index – is viewed by many as having at least another 15% higher to go.

I have been quite hyper-focused on the IWM since late 2023 when we were expecting it to rally off the 160/165 region to an ideal target in the 203-214 region (with the outside potential to go as high as 225), even before we bottomed, as you can see from this chart:

And, as the rally structure took shape off the October low, I refined that target to the 210-214 region in December. On Friday, we just hit the low end of my target.

Now, I am not going to bore you with the detailed analysis which caused me to look for that rally back in October of 2023 when most others were expecting the IWM to crash at that time. Nor will I bore you with why I refined our expected rally target to that region, or with the detailed analysis as to why I am not in the camp for a continued 15% move from here.

Rather, I will simply say that this chart is strongly urging caution to me at this time. In fact, as long as we remain below 214 and then see a return back down to the 194 region in the coming weeks in an impulsive manner (term of art for a 5-wave structure which adheres to our objective Fibonacci Pinball standards), then I am going on “crash-alert.” Yes, you heard me right.”

As we now know, the market topped in our topping target region and then dropped to our lower target region (190-194 IWM). Yet, the structure with which we dropped was not the cleanest of 5-wave structures. So, I am going to need further evidence that a 25% decline is in progress.

Such evidence will come with another 5-wave decline back towards the 190-194 region again. Should we see this in the coming weeks, then I will turn bearish on the ensuing bounce back towards 197-200, as we would then have a very strong set up for a 25% drop in 2024.