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There are reasons for this basic fact of stock market life. The stock market deals with the future not the past. Information that appears in today’s newspapers is a report of events that have already occurred. According to the work of the academics who have studied behavioural patterns in the stock market relative to the dissemination of news, the stock market is totally efficient, and such is the speed of communication that there is no advantage whatever to be gained by acting on material which has been published for mass consumption.

Variations in share prices are the factors that lead to stock market profits, and the major turning points in the stock market are rarely confirmed by corporate earnings or the trend of business. If we examine a typical cycle, applying a basic Elliott Wave classification, we can see how this works.

As mentioned in the previous chapter, according to the wave principle, each bull cycle consists of three upward movements and two downward movements. Let’s take a look at the London Stock Market over the past 12 months (see Figure 2).

Figure 2. F.T. 30. JAN 1975-FEB 1976

In January 1975, the U.K. economy was looking disastrous and the newspapers were printing a steady barrage of doom and gloom. But, as if by magic, following the announcement of the Burmah Oil crisis, in early January share prices started to rise. Not only did they rise but they virtually exploded. Very few members of the investment community believed in the rise and there certainly was a complete absence of any fundamental support for the rise. It was not until later in the cycle, after the stock market had almost doubled, that many began to find reasons for the move… after the fact of course. By June of 1975 the stock market had risen from the January low of F.T.30 146.5 to a peak of F.T.30 368. Since many felt there was little improvement in the economy over the entire period of the stock market ebullient advance, the only reason they could find for such a rise was that Britain was heading for hyper-inflation. Recollections of the manner in which the German Stock Market rose by 30 billion times its base level during the German hyper-inflation raced through the stock market. Just about the time this a priori judgement was receiving general acceptance, the market was beginning its first intermediate decline. Between January 1975 and June 1975, the British Stock Market completed the first Wave of what will subsequently be a five-Wave primary cycle. The second of the five waves began in June 1975 under the growing belief that the bear market was returning once again. By August 1975, the British investment community was forecasting a return to the lows of the previous bear market, and even lower. However, share prices began to rise again as the British Stock Market began “Wave 3” of its primary cycle, having complete Wave 2, the corrective down-wave according to Elliott.

1976 brought cheer to the investment community in Britain. The month of January produced a plethora of economic forecasts which pointed to a revival in the economy. Lead economic indicators were said to be turning up. Relations with the trade unions were improving. Share prices on Wall Street were doing well and all in all, a more bullish atmosphere couldn’t be found. Fund managers were quickly reducing liquidity positions and the private investor began nibbling at shares once again. Finally, after 12 months of rising share prices, the investment community discovered the reason. There was about to be a brand new export-led growth in the British economy. In response to the general feeling, share prices rose throughout the month of January to reach a peak of 417 in the Financial Times Ordinary Share Index on the 30th. There didn’t appear to be a cloud in the economic sky. Share prices then turned down and continued down through February and March. Wave 3 of the Elliott Primary was completed with the February-March move acting as Wave 4, the latter being given impetus by the resignation of Prime Minister Harold Wilson.

There were many bearish rumblings generated as a result of the political fiasco. However, the influence exerted on the stock market was short-lived with rallying action punctuating the end of March 1976. While there were many “bear scares” throughout the January 1975-March 1976 bull move in the F.T.30, students of the Elliott Wave Principle would not have been deterred, for the end of the bull market was not likely to occur until a completion of the fifth and final wave.