By Elliott Wave International
The following article was adapted with permission from the November 2014 issue of The Elliott Wave Financial Forecast, a publication from Elliott Wave International, the world’s largest market forecasting firm. Follow this link for the complete article.
Here’s a key principle concerning the role of government in bull and bear markets, as outlined in The Elliott Wave Theorist in 1991:
Government is the ultimate crowd, every decision being made by committee. It is always acting on the last trend. (For example, the Federal government passed securities laws to prevent the 1929-1932 crash…in 1934.)
The Federal government repealed that law, known as Glass-Steagall, in November 1999. [A major peak in stocks] occurred within a matter of weeks, in January 2000. Government’s effort to bring back the old bull market started in 2001 with a bailout of Argentina. Citing a critical difference from prior bull market rescue efforts, the September 2001 issue of The Elliott Wave Financial Forecast asserted that the stock market would fall straight through the effort to shore up that country. It did, as the Dow declined 30% through October 2002.
A similar short-term market plunge through a government-sponsored bailout initiative occurred on October 2. That’s when Mario Draghi, president of the European Central Bank, announced a quantitative easing program under which the central bank will buy $1.3 trillion in loans and mortgages, “including some junk-rated assets from Greece and Cyprus.”
Draghi pulled the trigger even though the Euro Stoxx 50 Index has rallied for almost three years and, at the time of the announcement, was within 5% of its June high.
In 2012, Draghi’s bold “whatever it takes” ad-lib was “seen as a masterstroke that halted the downward economic spiral that had gripped the continent.” This time he fired live rounds in the form of a long-awaited “U.S. Federal Reserve-style QE” program. But the blue chip European stock index gave him no respect; it fell. The Euro Stoxx 50 is still down 3% from its October 2 close.
The performance is similar to what happened in November 2007, when a consortium of banks organized by the U.S. Treasury created a fund (called M-Lec) to rescue the hemorrhaging market for subprime loans. At the time, The Elliott Wave Financial Forecast explained that the difference between bailouts in a healthy bull market and those in a major bear market is that in a bull market the bailouts invariably come near major lows, when the market is ready to turn up anyway. In bear markets, however, pessimism is more persistent, and the stock market ultimately falls through even the most aggressive bailout efforts.
The Elliott Wave Financial Forecast also stated that the “fascinating thing about the bailout attempt is that it was needed before the stock market even headed down. As we said in April [2007]: Chrysler and Continental Illinois were ‘too big to fail,’ the unfolding crisis will be ‘too big to bail.'”