Belated New Years predictions! Yelnick made predictions for 2003 and reviewed them in early 2004, and it is time to do it again. The market is correcting on Yelnick's schedule, bouncing off Yelnick's predicted levels. After the current sell-off, look for a summer rally. What next? Three scenarios:
* Mad Bull Disease: The summer rally will continue into the fall. The Dow will get to new heights. The Bubble Echo psychology is not a wave 2 echo, but we are still in the bubble! Despite the enormous drop off the peak, we never left the bull ... While a little difficult to swallow, this IS conventional wisdom. If this downtick is but a pause on the new bull, it shouldn't drop too far or last too long, and new highs (at least in the Dow) are ahead.
* Cycles Rule the Waves: The summer rally fades into the fall, and we have sickening slide in 2005 and into 2006 to the bottom. Might have a bounce in the middle from Nov04 to Apr05 ... Yelnick has reported that the 4-year cycle, driven by Presidential elections, is predominate right now. To repeat, in general, the peaks in the market have come in election years, and the bottoms in between, due to re-election manipulations. The excesses that *may* get Bush re-elected are paid for in a subsequent down 2005.
* Drop The Big One: The current drop is deeper than expected, and although we have a summer bounce, it fades early, leading to a much deeper drop into the election. This is the beginning of wave 3 down, the longest and strongest drop. Since wave 1 took three years, this one lasts 5 years, with constant downward movement into 2008 ... While very scary, this is Prechter's view. It may not start much differently than the Cycles scenario, but it continues relentlessly downward much like the market drop in 1931-32, although over a longer period.
All these scenarios might begin similarly, but they diverge much more dramatically than the predictions of last year. They are also all similar to last year's scenarios, as this wave 2 has kept these options open for one more year. This year, however, is likely to be the moment which reveals the real character of the post-mania market.
Yelnick explored the Mad Bull previously. The Mad Bull seemed to gain support in the March employment numbers, which have inspired the view that we are indeed coming out of the recession, and that this correction has bottomed. The bull is back!
One problem - manias retrace their start, and we haven't yet (even with the spectacular drop in the Nasdaq). The bullish ewave case is that the correction from 2000 was a wave 4, and we began the wave 5 in Mar03. Even though we haven't retraced to the stock levels at which the mania started, we have retraced the P/E levels - on the S&P 500, the overall P/E did return to 1995 levels, based on forward looking earnings. We would now be in a long-overdue 'normal' correction, but make no mistake, new highs would be ahead. Prechter counters, in his most recent Elliott Wave Theorist, that "the psychology behind the market never turned bearish," so he thinks "there is no way that October 2002 was a fourth-wave low." Still, Prechter counts this as a major wave 4, but if it were a lower-degree wave 4, the type of bearishness he expects need not be there.
The Cycles scenario is the easiest to make, since it is backed by history. It also fits closest to long-standing predictions of Yelnick, Prechter and many other ewavers that the Big One Down would be in 2004. Prechter has had this date (or 2003) on his timing schedule as a low since at least his 1995 book At the Crest of the Tidal Wave, although he now thinks 2004 will mark a high and 2008 the low. 2004 is also the nominal ending of the most recent Kondretioff cycle. The Cycles scenario low is likely to be in 2005 or even 2006, however. Given that we are still relatively bouyant as a market, it would take a major crash to drive this market from a position at the end of this summer somewhat where we are now down to retracing the mania (Dow 3600 for example) by the end of 2004. Crashes of this magnitude are rare, so it seems more likely the low is reached in 2005 - 2006. Even the permabear himself, Prechter, has abandoned the 2004 bottom.
The Big One scenario takes longer to unfold but would be marked by a more dramatic downtick this year. This downtick will be surrounded by other confluent events, which Yelnick has called Markers of the Fall. Coincidently, these might begin to appear in the early fall. To summarize, they are:
* Increase in interest rates, driven by Dollar weakness not inflation
* Google IPO fizzle
* Economic activity slows and double dip recession looms
Yelnick's view is that we will first see the Markers of the Fall before we head impulsively down to the low, that low will follow the Cycles scenario with a bottom in late 2005 or early 2006.
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