When you read the title of this article, I am sure you assumed this article would be all about the latest event of fake news which supposedly rocked the market this past Friday. Well, I am sorry to disappoint you.

You see, many investors have been following fake news for much longer than you realize. Well, more accurately, the news has been real, but the expectations held by analysts and investors has been fake.

As I have been presenting for quite some time now, we have seen many expectations of negative reactions to news being presented by analysts over the last two years. They have pointed to news events like Brexit, Frexit, terrorist attacks, rise in interest rates, cessation of QE, the Trump election, and many other reasons as to why the stock market will start heading south in a big way. So, while they have all pointed to real news events, their expectations have been fake.

So, maybe its time to consider that fake news and fake expectations have potentially been hurting investors these last few years!?

And, rather than maintaining fake expectations about how the next news event is going to “cause” a move in the market, at some point, investors may have to accept that the substance of these news events do not cause anything. Rather, it is the investor reaction to the news events which cause movements in the market. And, investor reactions are driven by investor sentiment.

When investor sentiment is positive, seemingly negative news events are discounted (terrorist attacks, North Korea, rising interest rates, cessation of QE, etc.) as the market continues on its northern trajectory. However, as the market completes its natural path of progression, we reach a point at which it is time we can begin to expect that investor sentiment has reached a pinnacle, and will likely turn south for a time.

If you are being an honest observer of the stock market for these last two years, then you can admit that this is the simplest and most accurate explanation for what you have seen with your own eyes. There is no other reasonable explanation as to why the market has shrugged off news that most have expected to not only stop the market in its tracks, but also potentially cause a huge sell off in the market.

Now, the question you must ask yourself is if you have the tools to be able to identify when investor sentiment is positive, when it is negative, and when we are approaching a potential turn in sentiment?

Price pattern sentiment indications and upcoming expectations

Everything I have written above should force you to think critically whenever you chose to read analysis being published about the market. And, even the analysis I present is often misread.

Recently, I have seen a number of people quote me as saying that I expected the stock market to certainly top at 2611SPX.

It is certainly true that, back in 2015 and early 2016, I was looking for the SPX to rally from the 1800 region to an ideal target of 2537-2611. But, it did not mean that the market was certainly going to top at 2611. Rather, this was a standard target region which my analysis pointed towards for this rally, and one which we set two years ago, well before this rally even began. And, it meant I was expecting a 40%+ rally in the SPX, while many others at the time were expecting a stock market crash. Now, since we have exceeded the upper end of the target region I set two years ago by 2%, it certainly suggests to me that the market is quite stretched up here, and I am turning much more cautious on the macro scale.

However, for those that have read my analysis since early November, you would know that I was clearly noting that the IWM was setting up for a strong rally. Moreover, I stated quite clearly that we could not see a potential market top until the IWM completed this last segment of its rally. While I was unsure as to whether the SPX would be able to rally alongside and in lockstep with the IWM, I certainly was not expecting a top in the overall equity market until the IWM completed the rally I expected off the mid-November lows.

So, ultimately, when one market presents an unclear picture to me, I try to look at the other charts within the market to see if a clearer picture is presented. This time, while the SPX was not terribly clear to me, the IWM was certainly telling me to not get too bearish too soon, as it still was pointing to further rally potential for the market. Yet, it also suggested that, once we completed that segment of the rally in the IWM, we were likely approaching a larger degree top.

This past week, the SPX played a little catch up to the IWM, but certainly lagged the IWM by almost half in terms of percentage moves since the mid-November lows, with the IWM rallying approximately 7% since its mid-November lows, and the SPX bringing up the rear with almost 4%. So, while I was unsure if the SPX would provide us with a rally, I think it should be quite evident that moving over to the IWM was the prudent move for investors since mid-November.

And, until the IWM is able to break back below the low we struck on Friday, I still think there can be further highs to which the IWM can push in the coming week or two. So, while I am getting much more cautious in the equity market, I am not quite yet bearish.

Remember, the larger picture suggests that the SPX will likely see levels exceeding the 3000 region in the coming years before a major bear market takes hold. Yet, I am expecting a sizeable pullback to begin once the IWM completes this rally phase.

By Avi Gilburt, ElliottWaveTrader.net