The big picture scenario: markets dropping in 2004 to levels of below Dow4000 and SP400, and then continuing in a triangle formation (lower highers and higher lows) into 2011-2016. If so, the period from 2004 - 2008 should be a barn-burner bull market similar to 1933-37, where the Dow went up roughly 5x in 4 years.
Many technical indicators give the forecast of below Dow4000 / SP400:
> manias retrace all the way, and this one started in Nov94 (after the Republicans won control of Congress for the first time in 40 years) around Dow3600 / SP400
> in a head-and-shoulders pattern, the amount of the rise above the neckline is the amount of the drop below, and the 1998-2000-2002 H&S pattern in the S&P has a neckline of ~SP950 and a head at SP1550 - hence the drop should be 600 pts or ~SP350
> P/E ratios get down to ~10 at a bear market bottom, whereas currently the ratio is 24 based on reported earnings (and much higher based on more traditional earnings metrics), meaning the S&P would be 2.5x lower on current earnings at a typical bottom, or around SP350
A drop of this magnitude is nevertheless extraordinary and would reflect fundamental problems in the real economy. Currrently debt is at record levels and economic conditions are deteriorating. While unemployment has been flat for two years and consumer spending relatively bouyant, this may be due to the massive refinancing of homes with the drop in interest rates. If this market scenario plays out, we should see in parallel an accelerating deterioration of the real economy.
There is a divide in the Elliott Wave community on the magnitude of the current drop. The extreme view, trumpeted by Prechter, is that the Great Bull Market of the Industrial Revolution since 1789 has run its course. This is based on wave count, which has us just ending the fifth wave of the bull market that began in 1932, a bull market that reflects the fifth wave at a higher degree since 1789 (grandiosely numbered as V). The problem with this count, besides the obvious that industrialization does not seem to have run its course, is that on an inflation-adjusted basis it appears that the bear market that started in 1929 did not end so quickly, and indeed ran until 1949. This is also consistent with more general economic and political views on the Great Depression, that are that it did not end until after WWII.
The alternative view, supported by Zoran among others, is that we have completed wave 3 of V and are in wave 4 down, with a final wave 5 to go. Under this count, wave V began in 1949, and we have had only 3 waves so far - wave 1 from 49-66, wave 2 from 66 - 82, and wave 3 from 82-00. Prechter counters this by saying that the wave from 49-66 had better technicals than the recent wave from 82-00, and typically wave 3's have the strongest underlying characteristics. The relative weakness of the 82-00 bull market vs. the earlier one may be explained by the Kondretioff Wave, which began in 49 and is ending in 04; a bull market wave which runs through the end of a K-wave will show weaker characteristics. K-waves begin with a bang, peak with inflation, and end with deflation.
The implications of these differing views is profound. If we are correcting the 200 year run-up of the Industrial Revolution, the potential depth will be quite low, the duration quite long, and the fundamental economy quite weak. If we are in a wave 4 of V, the depth should be lower, the duration shorter, and a long bull market wave 5 will follow, carrying beyond our investment horizon.
Most likely we are in that wave 4, as key elements of the core economy look sound: Moore's Law is still working, oil is not running out, and globalization continues.
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