Bubble Echo

This month's Elliot Wave Finanancial Forecast (EWFF) has an excellent analysis of why this period is a wave 2 rather than the start of a new bull. Bull markets climb a Wall of Worry, bears slip down a Slope of Hope. In between, a wave 2 echos the psychology of the prior bull and often exceeds the excess of the prior manic peak. Hence the 'bubble echo.' The EWFF analysis is compelling.

EWFF quotes Investors Intelligence as noting that the spread of bulls over bears is a "whopping" 42.5%, where the normal spread is 10%. This spread shows " 'excessive optimism.' " Bulls were steadily more than bears for 27 weeks in the 1999-2000 bubble, but have been above bears now for 43 straight weeks. EWFF also looked at another analyst group, the American Association of Individual Investors. Into the Jan 2000 peak, the normally cautious AAII had been bullish for five readings, and continued bullish while the market plummeted for 11 more readings. (What does that say about market analysts??) Recently they have been bullish for 29 straight readings.

Money also flooded into mutual funds in Jan 2004 at a new record level, exceeding that of the Feb 2000 previous record. Other echos include the return of the big Merger. Remember AOL Time Warner? Now we have Disney Comcast, and Cingular ATT Wireless. Maybe Larry Ellison will get lucky and not snag Peoplesoft.

For other indicia of why this is a countertrend rally in an overall bear market, the EWFF looks at cultural trends. In a Bull, we are inclusive, a Global Village, inspired by the heroism and innocence (Forrest Gump comes to mind), and essentially secular in outlook. In a Bear, we turn to religion and get lost in the Dark Side (The Exorcist comes to mind as a decade-defining classic from the last great Bear, the '70s). The EWFF points out that the hit movie of the moment is The Passion of the Christ, which combines religion with graphic violence if not torture. Yelnick adds that the prequel to The Exorcist, which has been wending its way in Hollywood since 1997, may finally came out of the can. An echo indeed!

Why the Bubble Echo? In the bubble, savvy investors give up their reluctance and join the party since sitting on the sidelines is costing them returns. They vaguely know it is foolish but feel they have to participate to keep up. (Greed is really Fear, fear of falling behind.) In a bubble echo, the same investors are convinced they caught the bottom. Their conviction to play is much stronger, now bolstered by a sense of market timing.

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As as aside, Yelnick would like to plug the EWFF. During certain periods, such as the past 15 months, the EWFF seems to lose its way, prematurely calling a top over and over and then looking for explanations. See Prechter Year in Review for an example. Zoran believes this is because the underlying markets are order-seeking mechanisms in a Chaos Theory sense, that go through periods of high order where the Wave Principle works, and then through periods where chaos rules, and the waves seem to lose their predictive power. (Yelnick reads Zoran with keen interest as he seems to be blazing a promising new trail for the Elliott Wave world.) We now seem very close to order re-emerging in the form of the long-awaited Big One down. More on this in future Yelnick posts. The EWFF analysis should be the best guide through the coming months. If you are not subscribers, I would recommend signing up.

Comments

[jesse slingerland]

I thought this websites opinion was that prechter had a "doom and gloom opinion" because he doesnt use a chart plotting on a constant dollar basis? He uses the wrong charts in his application of elliott wave theory but we should pay for his service?

[dd]

His big picture may be off but his services should call the short-term twists and turns of the next 18 months quite well, given we are leaving a non-directional move and entering a directional move. Also, his analysis of underlying social mood is still excellent.

[jesse slingerland]

thanks for the response

[Brian Costello]

I am also a big fan of Zoran. His competence and ethical behaviour are both admirable.
Your assumptions above are, I believe, in the money.
Brian Costello

[Hamed Elbarki]

Great article, thanks for sharing!