Markets Aren’t Rational

By Elliott Wave International

As the news from Europe about bailouts and the euro’s viability changes by the hour, EWI’s European editor, Brian Whitmer, doesn’t see the uncertainty as a problem. In fact, he points out that when uncertainty blooms, you can really see that markets aren’t rational and that Elliott waves tend to become even clearer. He discusses the "uncertainty in Europe" in this excerpt from the November European Financial Forecast:

Markets Aren’t Rational
How many times did analysts blame the summer sell-off on "uncertainty in Europe"? But as stocks rallied over the past two months, notice that the European situation became more uncertain, not less, as the headlines in this chart attest. Who would have guessed that stocks could jump 30% amidst such uncertainty?

Likewise, the financial press uniformly attributed last Thursday’s [Oct. 27, 2011] 5% upward spike to reports that EU leaders had reached "broad agreement" on a path forward. But, here, too, uncertainty, not accord, prevailed that day. "Most details remain," said an economic consultant quoted in the Financial Times. "We have a few more weeks of uncertainty to digest," added a bank executive with Royal Bank of Canada. Much of what is needed "has not yet been finalized," concluded the FT. The most important item of news that day was that Greece’s bondholders would take a 50% haircut. But even here, the plan was either short on details, under discussion, or otherwise unclear, according to news reports. As stocks fall again, the press will cite all these reasons and more to rationalize the decline.

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This article was syndicated by Elliott Wave International and was originally published under the headline Markets Aren’t Rational. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.