Squawk Morning Briefing: Leading Indicators

As bad as economists are at interpreting day-to-day events and their impact on financial markets, one thing that most agree on is that the stock market is a leading indicator of economic activity.  The evidence is sufficiently strong that value of the S&P 500  index is one of several components in the  report of leading economic indicators.  Most investors choose stocks with the exact opposite belief: that better performance in the economy will be reflected in stocks.  When individuals lose confidence, it is difficult for the economy to expand, and so mood matters to both the stock market and the economy.  Of course, when both improve, there is a self-reinforcing virtuous circle where better mood begets a better economy and a better economy begets a better mood.

Catastrophes like the one currently unfolding in Japan are shocks to the system.  They most always have some short-term impact on markets, but the lasting effect is governed by mood.  If positive sentiment was growing but not yet peaked then a shock may just be a minor setback — a correction.  However, if the mood was overconfident with extreme risk-chasing then the shock can serve to re-introduce a healthy dose of skeptical fear that could lead to a turn.

For some time we have noticed markets being stretched and that sets the stage for a decline, the kind which can be brought on from a shock.  As always, the reaction to that shock will be the thing which tells us whether we are changing direction.  We need to let the stock market be the leading indicator we know it is.  In this case, we need to see whether moves to the downside come in  five waves or three.  This will uncover the nature of the sentiment and tell us whether a sell-off is likely to be sustained or merely transitory.  This remains the key piece of evidence we keep watching for.  Our videos for today update the short-term view, and slightly longer-term we need to pay attention to the more significant questions for five versus three as it unfolds.

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Elliott Squawk delivers thorough market preparation every morning in time to take action during the trading day. By combining up-to-the-minute futures activity with traditional end-of-day analysis from cash indices, you receive analysis based on the latest conditions as the trading day sets to open. Each issue of Elliott Squawk goes beyond traditional Elliott Wave analysis because we recognize that trading Elliott Waves is much more than just looking at the most likely current count. Squawk will prepare traders to assess the market action as it unfolds by answering questions that any Elliott Wave trader should consider:

• What price levels and wave motions would confirm an expected move?
• What price levels would make an alternate scenario more likely?
• What technical indicators should be watched throughout the day to interpret wave action?
• What intermarket movements merit special attention to understand likely price trends?

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From time-to-time when circumstances warrant, Squawk will present analyses of other markets that help interpret wave action in a covered market. For example:

• If S&P 500 and Dow counts are ambiguous and NASDAQ behavior helps identify the likely next move then NASDAQ analysis will be presented.
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Kevin McEwen and David Starr are best known to First Wave chat room participants as Kevy99 and Managematics and by their reputation for their Elliott Wave counts that have predicted market turning points. Kevin has been counting Elliott Waves for 28 years, successfully forecasting market moves in virtually every financial environment. David brings together talents in financial market analysis and software development to his wave counting. He has authored many of the studies used by First Wave Traders as well as a number of proprietary studies to aid in counting waves.

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