Market Hits New High, Prechter Calls it "Topping"

Ok, not quite where we are, but the Bulls are running and Prechter has had to pull back from a top call once again. Can the Bulls claim victory? Not quite. Non-confirmations abound: the Naz and the S&P lag the Dow, and Dow Theory itself is still in a major non-confirmation.  More critically, the Bulls are running into seasonal and cyclical patterns which point to an end to this wave 2 (or B) by May/Jun, and maybe sooner, by Mar /April.

The most consistent of these patterns is the four-year cycle. Most cyclical or seasonal patterns have little or no predictive value unless coupled with underlying causality - but the four-year cycle has an abundance of causality: the modern manipulation of the US economy driven by the Presidential elections. The STU took a look at this pattern in Friday's report, and can be expected to come back to it over the next few months. The attached chart is striking in its regularity: the dip is every four years, in the even year between elections. Even the one anomaly, the 'right-shifting' of the bottom in 1987, had a similar dip already in 1986, right on schedule.

The dips can also inform as to whether we are in a Bull or in a counter-trend rally in a Bear.

The dips are lower each four years during a Bear market; check out 1966-1974. Adjusting for inflation, the dips continue lower all the way to 1982. Similarly, during the great Bull run from 1982, the dips are higher each four years, until 2002. Apparently this pattern is also seen even farther back than this chart. Hence, if the dip in 2006 is lower than 2002, it is an indication that we are still in the grip of the Bear. Specifically, that we are still in a wave 4 down from 2000, and given its length, it makes it more likely this is 50W4 than 82W4; in other words, the Bear could continue as long as 2014. On the other hand, if the 2006 dip is up from 2002, it would suggest that 82W4 ended in 2002, and we are in 82W5, with a rip-roaring wave 3 just ahead, beginning in 2007.

Coincidently with the STU, or maybe not a coincidence, Prechter in his EWT completed a three-part assessment of technical patterns such as bear flags, and showed how they are all subsumed within the wave theory, with one exception: cycles. There is a terrible irony in the failure to meld the wave theory with cycles, in that the modern rebirth of wave theory happened when a remarkable group of technical analysts, including Prechter and Neely, joined the Foundation for the Study of Cycles. Despite all their work, they were unable to achieve a Grand Unified Theory of technical analysis. While Prechter likes to say that Waves trump Cycles, currently the Cycles are ruling the Waves. My GUT tells me to watch the Elliotticians who are exploring timing models, such as Robert McHugh, who posts frequently in Safehaven, and Fibonacciman.

Cycles says: end of this counter-trend rally late Spring, about when the Greenspan Indian Summer gives way to a Bernanke Winter, driven by (a) higher short-term rates and a deeper inversion of the yield curve, (b) coupled with a clear slow-down in US consumer spending due to the cratering of real estate refinance, and (c) possible oil price spike coming from turmoil with Iran trying to switch the oil trade from the Dollar to the Euro, all leading to (d) expectations of a recession in 2007. And when that occurs in 2007, the government will begin priming the pumps looking towards the 2008 election. Coupling that with continued Chinese pumping leading into the 2008 Beijing Olympics should give us a nice mini-Bull run in 2007-2009. Not as good as that 82W5 would have been (or will be), but we'll take it anyway.

Comments

[rdneu56]

I beg to differ on one issue:
The Dow Theory is not in a major non-confirmation! Both the Industrials and Transports are at new recovery highs from their respective market lows in October 2002 and March 2003. That means they have confirmed the current cyclical bull. It is however true that the Transports are at all time new highs while the Industrials are not, but that is not a non-confirmation.
All the fundamental negatives, rising rates etc, do exists, but as is clearly evident are not negatively correlated to stock-price at all - at least not yet. See also: http://www.putfile.com/rdneu56
One can envision an inflection point where investor psychology turns negative. The Indexes themselves will indicate when this will be happening.

[LoneStarHog]

rdneu56 said, "The Dow Theory is not in a major non-confirmation!"

This is absolutely false. The Primary Trend is still in a Dow Theory nonconfirmation and has been since 1999.

Excerpt: The last Primary trend reversal occurred in 1999, and it was a sell signal. This has not been reversed, therefore the rally from October 2002 through February 2006 has been a Secondary rising trend inside a Primary declining trend, according to Dow Theory. That Primary trend sell signal occurred because after both the DJIA and Trannies hit confirmed all-time highs on May 12, 1999 and May 13, 1999, the Trannies failed to confirm the DJIA’s higher high in August 1999. That higher high non-confirmation was then followed by confirmed lower lows in both indices in September 1999 — a Primary Sell Signal. This sell signal was confirmed in 2000 when the DJIA went on to reach a higher all-time high January 14th, 2000 that the Trannies failed to confirm. That non-confirmed top was then followed by confirmed lower lows in February 2000. Thus the Primary Sell signal was confirmed. The averages have not been able to give a Primary Buy signal since.

Missive> http://www.financialsense.com/editorials/2006/0217.html

[rdneu56]

LoneStar:
It is all a matter of degree. What constitutes a secondary in a primary trend? As a general guideline for secondaries I use a both 10% pullback from the most recent high (low) and a 30% to 60% retracement of the last move in the direction of the primary trend. With those parameters we have now a cyclical bull. It is however possible that this is a cyclical bull market in a larger, secular bear market trend. Time will tell...

[LoneStarHog]

rdneu56 said, "It is all a matter of degree...."

Well, I guess that you can create your own rules, if you wish. However, it is then your personalized version of Dow Theory and should be referred to as such.

Traditional Dow Theory states as I originally posted.

[rdneu56]

LoneStar:
I am delighted that your post reflects the traditional and therefore generally accepted interpretation of the Dow Theory.

[Confuseius]

People watch the cover of Time, Newsweek, Economist, National Geographic etc. and use them as "the magazine cover indicator". e.g. National Geographic ran a cover saying "The End of Cheap Oil" ... just before oil dumped.

A current variant is that EWI have in recent times been making fun of books such as "The Demise of the Dollar" and "Hot Commodities", citing them as an even stronger reason than the magazine cover indicator to be bullish US Dollars and bearish commodities.

Thinking about this the other day, I came up with a great new indicator: The Prechter Book Indicator.

He published the bearish "At the Crest of the Tidal Wave" in 1995, just before the colossal late-90's bull market. He then published the uber-bearish "Conquer the Crash" in 2002, just before the enormous rally til present.

So: bearish book published by Prechter = get set for an enormo rally in equities.

This may sound harsh, but it's accurate. And if EWI are going to dish the dirt on others, they have to be prepared to take it themselves!!!

[mroz78]

Confuseius I could not agree more.....EWI is much better at pointing out "others" mistakes while their own cannot be ignored, the ultimate pot calling the kettle black.

[EN]

This market is like Jason Voorhees. It does not stay down for long. I would be surprised if we break below 1000 in the S&P anytime in the next few years. But we are always in a third wave crash so 1360 here we come.

[SSSS]

Correct your facts Yelnick:

The Foundation for the Study of Cycles
http://en.wikipedia.org/wiki/Foundation_for_the_Study_of_Cycles

Prechter and Neely NEVER started it, they were merily hang-arounds who never understood much and still don't.

[stewart pid]

this discussion reminds me of one the questions on the final exam of high school physics - 'Is a photon more like a wave or a particle?'

I'm partial to the belief, held by a certain liberal 60s economist (whose name I don't recall) that the stock market represents a society's unneeded wealth - it's a figment of the collective imagination, not the foundation of the 'real' economy. In the past few years, this view has been discredited, but that doesn't mean it isn't still accurate.

For example, while the historic return in the stock market might be something like 10%, this figure comes from too generalized a view. A Carlyle Group investor (aka, a mover-n-shaker) will do many times better than us ordinary folk, and while there may be a good many more of us, we don't start the game with the same amount of chips, so we count for far less than our numbers seem to represent. While the 'average' return might be around 10%, the 'in-crowd' will see returns far higher, and the rest of us will make due with +1 over the rate of 'real' inflation.

so just like in that high school physics exam, gotta remember it's a matter of from where the 'independent observer' looks. When attempting to measure between the predictive value of the wave/cycle approach, I think the question of 'from who's perspective' becomes very relevant.

Since most of us aren't on the board of the Carlyle Group, and 5% of our equity won't be getting 200-300% returns, we need to consider the wave/cycle approaches from a more ground level view.

Mr. R. Prechter has made some pretty bad calls. More than a few perma-bears who post artilces on the net, who were in agreement, have been decimated the past few years. One even had to shut his site down because he went broke. If you'd followed the EW advice from 2002's Conquer the Crash", you'd be down 50-60% from selling your home (many did) and you'd have missed the 80% run up in gold - but your money would still there getting 2% in a 'safe' bank, which is more than I can say for a few margin day traders I knew (but then again, they got in under the old bankruptcy rules!!!).

So who cares if in the end he's vindicated because the Dow hits 7000, if you've already missed out on many 'opportunities of lifetime'? From ground level, the EW seems permanently discredited for our generation.

So just like on that HS physics final, I could rattle off a few more reasons for & against, but in the end, I'm still totally confused. Who cares if the dang thing is a wave or a particle? Just like, who cares if cycles are better at predicting outcomes than waves AT THIS PARTICULAR POINT IN TIME and from a OVER-MACRO PERSPECTIVE? I need a good rate of return the moment I need to cash in, not 2 years +/-either side!

[disappointed dan]

How dare some of the posters to this site complain about Prechter. He publishes many of his subscriptions free of charge and has always been concerned about helping the average joe. He has done more to liberate you from your prejudices than you know. Prechter is the reason many of you are here today, as students of the market. He has always been on the forefront of market research. And no one is right 100% of the time, so I'm happy with his calls, even if they are sometimes early. You are a bunch of sour grapes, jealous, bitter people who don't know genius when you see it and worst of all are ungrateful. Mr. Prechter, thank you for your work and courage.

[yelnick]

SSSS, thanks for the background on the Foundation for the Study of Cycles. My source for this was part of the Foundation when Prechter and Neely were involved, and I leaped to the conclusion about who founded it without checking with him or Wikipedia. I have corrected the post as well. I encourage you and all my readers to comment and correct!

[Prechter predicts Market APOCALYPSE for 1996]

The Elliot Wave Theorist dated 11/18/96 - Robert Prechter predicted the market will plummet more than 50% over the next two years, followed by a 1930s-style depression.

According to the Wall Street Journal (7/17/97), Prechter has lost 75% of his clients since 1988 and recently put together a special report explaining that the Dow will inevitably plunge below 400 (95% decline).

http://www.businessweek.com/1996/47/b350224.htm

[Disappointed Dan]

It is very easy to take Prechter's comments out of context. In the space of a few sentences, it is impossible to fairly judge the man's work. He is still the most accurate forecaster I know and I suspect that your willingness to denigrate the man stems from an anger at yourself or perhaps an unwillingness to look dispassionately at the wave structure. Third waves generally top with the sort of arrogance that has been demonstrated. There will be gratefulness, humility, and contrition on the way down...

[Dow will drop to 4000 by April 2003 and shares of AAPL will sell for 25 cents.]

----------

Elliott Wave's Prechter, Hochberg see impending drop to.
Dow 4,000.

By Thom Calandra - CBS.MarketWatch.com
Oct 17, 2002

SAN FRANCISCO (CBS.MW) -- The U.S. stock market's dramatic October rally is about to dupe the majority of investors, say the folks at (Elliott Wave International.)

The 30-stock Dow Jones Industrial Average will lose half its value in the next six months to about 4,000 on the blue-chip index, says Prechter. When it's all over several years from now, the Dow will trade below 1,000, Prechter says.

"What's going to happen when the stock market finally bottoms? You'll be able to go in there and buy stocks that used to trade at $85 a share for maybe half a dollar or a quarter of a dollar."

SOURCE: http://www.cbs.marketwatch.com

[Dubious investor]

Congratulations, you were able to fish around for hours and find one of a few predictions Prechter missed the timing of! I hope you're happy. The truth is, Prechter's methods continue to be more reliable than your out-of-context example suggests. But then again, I maintain that the emotions steering you are indicative of a wave 2 bounce. I would love to see what you are posting when we hit 3 of 3 of 3 shortly!

[EN]

On the subject of the Foundation for the Study of Cycles, Prechter and Neely never actual met back then and only met for the first time last year at an EW convention in Paris.

After the 1987 crash, both Neely and Prechter wrote articles on what would transpire from a wave theory perspective. After the publication, Prechter talked to Jeff Horovitz (who at the time was running the Foundation for the Study of Cycles) and said that Jeff's placement of Neely's article and Precther's (side-by-side) in the 1988 CYCLES magazine (where Precther was massively bearish - surprise - and Neely was massively bullish, proclaiming the 1987 crash low would never be broken for the rest of his life) had done more damage to Elliott Wave as a theory than anything else in history.

Neely always knew (after 1988) that Precther would be wrong and would never stop calling for a massive bear market, which would start to harm EW as a theory. That is why (10+ years ago) he (Neely) started the transition from EW to NEoWave, so he could differentiate himself from the EW crowd and start to take credit for some of the discoveries he had made.

There is absolutely no question who is the better forecaster. Nobody even comes close to people like Glenn Neely and Jeff Greenblat (Fibonacciman) with his awesome timing model.

[rdneu56]

Can you fault the man if the method he has to use with is flawed?

[rdneu56]

Can you fault the man if the method he has to use is flawed?

[MHD]

Lowering interest rates to 1%, cutting taxes and increasing the money supply at an amazing rate should have given Prechter cause for concern as far as wave 3 goes. Add the cooperation of China and Japan continuing to buy our ever increasing debt and social mood is going to put on a happy face for a while. It also assures that when this debt orgy ends, it will not be a "happy ending" like you get at the massage parlor!
If all of the above had not taken place, Prechter's predictions would have been on the money. In the end, he will be proven correct as far as his outlook on debt and the disaster it holds for our country. However, no one has a crystal ball that can predict when the bubble pops, including Mr. Prechter!

[Dan]

Oh good god people. I have subscribed to Prechter on and off for years, read at the crest, and frankly the man sucks horribly on making market calls. Just last fall he sent out a special report entitled 'Drama Ahead' in which he predicted the end of 'wave 2' and a massive selloff directly ahead. He was wrong.

If you'd like, I can go back and detail the many, many, many, MANY bad stock market calls Prechter has made via the EWT and his 'Short Term Update'. I'd say that odds of getting it right with a coin toss is much higher than listenting to Prechter for the last 10-12 years.

That said, he DOES make a lot of good salient observations. However, after years of reading the guys stuff, I also know that you cannot trade stocks AT ALL using his 'predictions'. His overall 'survival' strategy, however, has worked - that is, buy treasuries and high quality bonds. Think about where the market has gone in the last 5-6 years, where someone who had been investing in the indexes would be, and where someone who had been buying treasuries that entire time would be.

The problem is that Prechter's organization pretends it can predict the stock market. It cannot. It's worse than tea leaves and astral charts - a lot worse.

[Lance]

Yelnick,

I find it completely astonishing that no one is remarking on the wave count for the NYSE composit. I would like to share my count with you and request that you or any other readers of this post validate or provide suggestive alternatives to the following count.

Wave one: (3/12/03)@4418.62 to (3/5/04)@6798.12 =2379.5

Wave three: (8/13/04)@6216.71 to (3/7/05)@7455.08 =1238.37
And finally Wave five currently in progress: (05/13/05)@6902.51 to (2/24/06)@8140.5 =1237.99

If this count is correct it would imply that this index has or will about to see its high put in place. Please review your charts and reply with comments:

Thank you,

Lance

[tony caldaro]

As a matter of public record. I gave Bob (Prechter) my EW count portending the crash in May 1987. He decided to use it as an alternate count. Barron's published it in June 1987.

Then again, in 1989 I was named Technician of the Year, on FNN by Jeff Bower their resident technician. As I only nearly the only EW tech to be calling for new highs, after the crash.

In 1999 I sent Bob another count portending a NAZ crash. Never heard a thing from him.

Turned bullish in October 2002, and still bullish...fwiw

[Paul]

I response to SSSS:

That 10% annual return figure that everyone cites is very misleading. First dividends have historically accounted for 4.5% of that return. That means that average annual appreciation is only 5.5%. Secondly dividend yields are at historic lows right now - the Dow yielding just 1.8% and Transports just 1.3%. Third, that 10% figure is the average for ALL stocks.
The S&P and Dow has historical gone up a couple percentage points under that figure. And lastly, inflation has taken out about 3% of that figure to leave 7%. And after dividends, 2.5%. That's right, just 2.5% annually!.

[Sideliner]

I remember in the summer of 1999 when Prechter called the Dow Supercycle wave 5 top. I don't know how many times before he'd called that wave count. He had to re-label it again in January of 2000. I haven't subscribed to the Financial Forcast since I lost my bets in the fall of 1999 relying on the call of the July top. Now that the Dow has reached a new high, I wonder how they are counting the waves now.

[President D Szvaselinovic]

Time for DIPAS comment.
Market go DOWN FOR BIT. THEN UP HILL! Like goat running from Borat!
GET READY VASZELINE DELIVERY GLORIOUS PROPHET OF ELLYOTWAVEISTAN!