Here's a Potential Signal for What May Be Next for U.S. Stocks

 

This action by investors resulted in "the highest total since 2014, and probably ever"

By Elliott Wave International

Frost & Prechter's Wall Street classic book, Elliott Wave Principle: Key to Market Behavior, first published nearly 45 years ago and said:

"Eight years of a raging bear market have taught today's investor to be cautious, conservative and cynical. Defensiveness is not in evidence at tops."

Considering this description of investors' mindset in the late '70s and early '80s, many market observers were not contemplating the start of a big bull market.

Yet, Elliott Wave Principle did forecast a major uptrend and that's what happened.

Bull markets are generally born after investor sentiment has reached a negative extreme.

Here in the late summer of 2022, there's the opposite mindset. Instead of playing "defense," investors are aggressively on the offense -- and in at least one sector -- by a record degree.

Consider this chart and commentary from the August Elliott Wave Financial Forecast, a monthly publication which provides coverage of major U.S. financial markets:

The depth of the dip-buying zeal is evident by a late-July retail surge into technology stocks. Investors pushed about $580 million into a basket of tech stocks, the highest total since at least 2014, and probably ever. "I'm extremely bullish tech stocks," one 27-year-old investor told The Wall Street Journal. The FAANG stocks -- Facebook (Meta), Apple, Amazon, Netflix and Google (Alphabet) -- and various ancillary issues are once again the big favorites.

Some professional investors are also gung-ho on tech stocks (CNBC, August 28):

[Famous Market Pundit]: I will not abandon tech stocks because the end of their downturn is near

This well-known stock picker might be right. Yet, keep in mind that stocks which lead on the way up tend to lead on the way down.

Also keep in mind that stocks in the technology sector are not the only focus of investors. According to a poll by deVere Group, a Zurich-based asset management firm, "56% of Investors Plan to Buy More Stock Before 2022 Ends."

And here's another CNBC headline (August 26):

S&P will be at 4,400 by year end, says "chief equity strategist"

In other words, the complete lack of "defensiveness" is likely a signal that stocks are not set to kick off another major uptrend.

The stock market's Elliott wave pattern can help you gain more insight into what to expect next for the main indexes.

If you'd like to learn about Elliott wave patterns, or simply need a refresher, the book which was mentioned earlier -- Elliott Wave Principle: Key to Market Behavior -- is an ideal resource. Here's a quote:

In the 1930s, Ralph Nelson Elliott discovered that stock market prices trend and reverse in recognizable patterns. The patterns he discerned are repetitive in form but not necessarily in time or amplitude. Elliott isolated five such patterns, or "waves," that recur in market price data. He named, defined and illustrated these patterns and their variations. He then described how they link together to form larger versions of themselves, how they in turn link to form the same patterns of the next larger size, and so on, producing a structured progression. He called this phenomenon The Wave Principle.

You may be interested in knowing that you can read the entire online version of the book for free.

The only requirement for free access is a Club EWI membership -- which is also free. In case you're unfamiliar with Club EWI, it's the world's largest Elliott wave educational community and members enjoy complimentary access to a wealth of Elliott wave resources without any obligation.

Get started by following this link: Elliott Wave Principle: Key to Market Behavior -- get instant access, free.