Investors Often Make This Big Mistake

10/28/2014 6:00 am EST

Focus: MARKETS

Last Friday marked 85 years since the 1929 stock market crash, so Bob Stokes of ElliottWave.com, shares a video in which he looks at the history of the US economy and warns traders and investors how merely following economic indicators can be a costly mistake.

Last Friday marked 85 years since the 1929 stock market crash and the start of the Great Depression.


Our research of US financial history shows that the stock market leads the economy. Economic expansions generally follow the start of a bull market in stocks. Likewise, recessions and depressions nearly always come after the stock trend turns down.
 
Yet, many investors follow economic indicators to make investing decisions. This can be a regrettable mistake.
 
Consider 2007. In the third quarter of that year, US gross domestic product was a healthy 2.7%. More than that, consumer confidence reached a major high in July and the jobless figure was 4.6%. Yet the market topped on October 9: What followed was a bear market that saw the Dow Industrials lose more than half its value.
 
Just before the 2007 price high, the September 2007 Elliott Wave Theorist warned:
 
            “The next two months should see significant stock price weakness…as the downtrend progresses, social mood will trigger commensurate financial and social events, so be prepared for a sharp increase in negative news.”
 
You may recall that negative news about financial derivatives and subprime mortgages did indeed dominate the headlines for months. The economy went into its worst slump since the Great Depression.
 
Again, the timing is crucial: the economy went into a tailspin after the stock market started to slide.
 
Now consider September 2014, which brought an improved jobless figure of 5.9%; also, the US economy grew 4.6% in Q2, a big improvement over the 2.1% contraction in Q1.
 
Even so, The Elliott Wave Theorist said this on September 19:
 
            “Our daily closing Dow projection of 17, 280 was achieved at today's close of 17, 279.74.”
 
Since then, the Dow Industrials have surrendered several hundred points.
 
Will we see another sharp increase in negative news?
 
Well, consider this excerpt from the 2014 edition of Conquer the Crash:
 
            “In 1929, the party was on and no one could envision how dramatically things would change. Just three years later, banks were failing across the country and unemployment was pushing 25% in the deepest depression since the late 1700s.
 
            In 1937, people were celebrating the economic recovery and dancing to BennyGoodman. No one had a clue as to how different the world would soon become.”

Likewise, in 2014, many people have been celebrating the economic recovery from the Great Recession. Thus a major economic shift in the months ahead would take most people by surprise.

By Bob Stokes of ElliottWave.com

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