| To: Jack Hartmann who wrote (4328) | 1/25/2003 12:34:18 PM | | From: Jack Hartmann | Read Replies (1) of 6482 | | | Dissing the Elliot Waver
I traded since 1987. I saw Pretcher and his people blew the great bull market of the 1990s.
Background:
Pretcher wrote a book in the late 1970s explaining why there would be a great bull market in stocks. He used an analytical tool called Elliot Wave Theory which said stocks move in a predetermine wave pattern. At that time the Dow Jones Averages had been stuck at a level below 1000 for the past 11 years. Prechter predicted a rally would carry the averages to 3,600. He was widely ridiculed for that prediction. He maintained his bullish stance during the early and mid eighties and even correctly called minor corrections (interruptions in the major up trend) of the bull market. In 1987 he correctly called for his followers to sell stocks ahead of the October 1987 crash. At this point his guru status was overwhelming. Unfortunately he maintained a bearish outlook from that point forward. He missed the entire bull market of the 1990s and his guru status was lost.
Let's look at some predictions recently.
Market Short Term Outlook
Oct 11 2002 12:05PM
Short Term ->Larger Trend is Down (Oops! Bull ran to end of November)
Larger Patterns (weeks-month)
The DOW is moving down in wave (B) of a flat pattern to 6200-7900.(7200-7500?) (Dow cruised to 8500)
The NAS is in wave (B) of a flat pattern down below 1150. (Nasdaq ralled 30%)
Smaller Patterns (days-week)
The DOW still has more downside in wave 4B to 7200-7600 [completed] then back up to 7400-8200 (7642-7800 probable) again in wave 4C, then wave 5 down to follow (6200-7200), then up to 8500-10000 in wave 2(C), then down in waves 3 of III. The big 2C rally coming is going to be followed by a fast moving downdraft. This rally will draw in investors one more time, only to clean them out again, unless they know when to sell. This rally can be used as the last chance to go to cash, (if not already) before lows are upon us that most would never think possible. We will probably not see these rally levels again in our lifetime.
(LOL! This shorting into E-wave cost them $$$$)
The NAS is moving down in wave 4B to the 1110-1160 area[completed] then back up to 1150-1250[current], then down in 5, below 1110, then up in wave 2(C) to 1400-1800, and then down in wave 3 below 1100. (Wrong again! Nasdaq 1400+)
Its moving fast, and is about complete. It appears a pullback in wave iv is in progress, with wave v to come to finish the rally off, possibly today, maybe Monday. We still have more downside coming in wave 5, before the larger rally. We could even see some capitulation for the fifth wave down.
(Finish the rally off! hehe)
The VIX is also giving indications of more upside in wave 3, with a pullback due in wave 4, and then more upside again in wave 5. A nice inverse relationship with the markets.
This was actual qoute on an E-Wave site.
http://members.attcanada.ca/~dsi/index.htm
Here is the excerpt from the April 1998 issue of Atlanta Magazine.
Q: I am interested in your goals, the arc of your career and how you perceive the future.
A: What matters to me is establishing the fact that social systems follow certain mathematical laws, just as do physical systems. The two sets of laws are different. I disagree with the conventional wisdoms, i.e., (1) that social mood and history are random or (2) that they simply follow physical laws of cause and effect, but are too complex to predict. Knowing the actual structure of social forces allows a framework for study that can yield useful knowledge about the social future, both general and
specific. I am finally beginning to make headway at this mission, but not through the media. In November, I made a presentation to the 21st Interntl. Conference on the Unity of the Sciences (ICUS) in Washington, D.C. Among
the speakers were the scientists who discovered quarks and quasi-crystals. It generated enough interest that I have been invited to speak in 1998 at another forum, the International Society for the Interdisciplinary Study
of Symmetry (ISISS) in Israel, another gathering of scientists from every field. My field is sociology, and I think that what R.N. Elliott discovered in the 1930s, which is being supported sixty years later by the new fields of fractal geometry and chaos, is of bedrock importance. It is to the successful study of aggregate human behavior what Newton's discoveries nearly 300 years ago were to the successful study of physics.
Q: Can you generally describe for the non-professional where we are now, primarily in terms of the U.S. stock market and also the global economy? Where are both of these headed in the near future? What significance do you attach to the market hiccup in October?
A: The U.S. stock market is in the grip of an investment mania. A mania is a persistent uptrend that attracts the public in large numbers and leads to historic overvaluation. In the past 300 years for which data is
available, no major stock market in the Western world has been as overpriced as U.S. stocks are today. The Japanese Nikkei index was valued slightly higher at its 1989 high, and it has dropped 65% since then. On the basis of dividend yield, U.S. stocks are 75% more expensive now than they were on the top day in 929. People dismiss yield as irrelevant today, but that is simply a psychological imperative. People always dismiss indicators of value
in manias. All manias end below where they started. I do not know where or when the high will be. All I am sure of is the ultimate outcome.
Q: Will the economic troubles in the Far East affect our market?
A: The situation in the Far East should not necessarily be construed as having predictive value. After all, Japanese stocks topped on the last day of 1989, fell 65%, and threw that country's economy into deep recession. Since the day that market topped, the Dow has tripled. So there was no effect. Social mood is independent of cause and effect. However, technically speaking, the more components of a market that drop out of an old trend, the closer it is to reversal. On a world scale, all of Asia has now dropped out of the bull market. That makes the world bull market that dates back to 1974 a much thinner one, and therefore one closer than ever to reversal.
Q: If I may be permitted to simplify, you have been generally very bearish about the stock market for most of this decade. In 1992, you told Barron's we were stair-stepping into a depression and some of your forecasts
are terrifying. Yet, the market risen steadily during that time. To the lay investor, that translates into the conclusion that you have been, to put it bluntly, wrong for a number of years. How do you answer that? Is being
right or wrong in this kind of context really the point of what you are trying to do?
A: Sure, I'd like to be right all the time on markets, but I'm not. I hope this is not a revelation to anyone. Here is how I see it: In the 1990s, I have consistently missed the extent of the stock mania, which is what some people gripe about. It is a perfectly justifiable gripe, in
context. The context is that The Elliott Wave Theorist is the only publication that predicted a mania in the first place, using exactly that term, in 1982-1983, after 17 years of a sideways trend. Manias are so rare that they barely happen once a century, and never has anyone announced one before it took place. Suppose it is the early 1600s, and someone observes that tulip bulbs, which have traded between 15 and 30 cents for two decades, are about
to undergo a mania that will take prices to $10 and then all the way back to 30 cents. People dismiss the outlook as delusional. Prices climb year after year, finally reaching $10. Then they go to $15. Then $20. The forecaster is
judged stubborn, wrong and delusionally bearish for having missed the last doubling. Prices finally peak out at $30 and then collapse to 15 cents. What was more harmful, missing the final phase of advance or missing the overall message of the big picture? Was the forecaster wrong or did he have a unique insight? Is it valid to expect him to have told you at the outset that the high would be $30? If he had an insight, is the method worth investigating?
Obviously, if this analogy is to apply to today's stock market, then the aftermath, whenever it comes, has to reflect original expectations, and that is something that remains to be seen. The context also includes looking
at other markets. The Elliott Wave Theorist is the only publication (that I know of) that has consistently predicted the bear market in gold. In contrast, we turned bullish on silver when it bottomed at $3.51 in 1993.
At The Crest of the Tidal Wave (1995) predicted deflation at a time when the only fear was inflation. Suddenly, we are beginning to see international discussion of the possibility of deflation. These are sea-change trends,
and I think the Wave Principle gives advance warning often enough that there is nothing more valuable. That is all the defense I am willing to play. If I bothered answering every sideline critic, I wouldn't have time to do what's important.
Q: Your company does a lot of forecasting in markets and assets other than stocks. Are those markets more significant than U.S. stocks? If so, why?
A: Currencies and bonds account for more money than stocks, so they are more important on a financial basis. On a sociological basis, stock averages, which reflect people's aggregate valuation of their own productive enterprise, are more important. The averages reflect social mood, which
is the main shaper of history.
Q: Is it fair to say that at the end of the day, you are struggling to make sense out of something that is essentially unknowable? If so, that is quite an intellectual challenge. What drives you to try? Where does money fit into the equation? Is it just a way of keeping score, of testing your theories and understanding, or is it the main reason for doing everything else?
A: The stock market is knowable, but it is knowable only on the basis of probability or contingency. You can know that there is a 70% chance of something happening, but that is not certainty. OR you can know with virtual certainty that something will happen, but not be able to say exactly
how and when it will develop. For instance, my co-author and I first called for the Dow to quintuple in 1978, but it took four more years for it to begin to happen. Similarly, I am convinced that the coming bear market will retrace the entire bull market. As in 1978, it is taking longer to begin than I thought. But as with the bull market, I think the fact that it will happen is more important than the details (which are important, just less so). People who think otherwise will not be on the sidelines when it matters.
Q: As an analyst, you are primarily known for reliance on technical numbers and historical trends, but then you also seem to pay attention to and place some emphasis on more subjective readings of cultural indicators, like music, movies and fashion. It seems usually the case that analysts are one or the other. How do you reconcile these two approaches and blend them together?
A: The stock market is one reflection of social mood. People communicate ebullience by buying stocks, wearing certain fashions, voting for certain candidates, and buying certain types of music. People communicate depression by behaving in opposite ways. When there is a preponderance of activity at one end of the scale, it suggests a social mood extreme. We usually don't use popular cultural trends as predictors of the stock market. They are coincident trends. In 1985, I simply pointed out the correlation. Political
and economic news lags social mood trends because such actions result from mood change, and the mood has to be well along before social actions are taken. For instance, peace treaties and reconciliations abound at major tops, whereas wars occur during or immediately after the second down phase of a bear market. Economic activity lags mood trends as well, so after stocks rise, the economy expands, and after they fall, it contracts. Forecasting the tenor of social action such as this ultimately matters more than where stock prices are going, and it is a lot easier to do.
Q: What does your reading of today's cultural indicators tell you about the markets?
A: Recent articles describe a cultural phenomenon that reflects a time very late in an extended bull market in social mood and its results: affluence (which is good) and the belief in never-ending affluence (which is
bad). It is very much a Gatsby era. There are countless examples from every field, but any detailed presentation would probably have to be condensed beyond recognition, so let's omit this topic.
In October 1998, in the collapse of the Long term scandal and the market was teetering Pretcher again talked to barrons. His call was that the long awaited Bear market has finally started and that the DJIA will now work its way below 4,000 - a 50% plus decline from where it is today. Prechter further predicted that when the Bear is finally finished in 2003 or 2004, that the DJIA will then be under 1,000. Clearly wrong again using the Elliot Wave.
Lastly is from Barrons again.
Barrons, November 4th, 2002
Bear-Market Genius
Bob Prechter called the market top in 1987 -- and has continued to ever since
By JONATHAN R. LAING
There are few second acts for stock-market forecasters who blow major market moves. Who today talks about, let alone remembers, technician Elaine Garzarelli who purportedly called the 1987 stock market crash and then flamed out once she began to run real money? And what fate awaits Goldman Sachs' Abby Joseph Cohen, the doyenne of the 'Nineties Bull Market who since has been blindsided along with almost everyone else by the past three years' fierce market slide?
And then there's stock market timer Robert Prechter. After more than a decade of relative anonymity, Prechter, 53 years old, is red hot once again.
He was literally everywhere in the media early last month when the Dow Jones Industrial Average and Standard & Poors 500-stock index slumped some 35% and 50%, respectively, from their all-time highs. His smiling visage even appeared on a front-page article on the bear market in USA Today. Favorable reviews of his latest book "Conquer The Crash: You Can Survive and Prosper in a Deflationary Depression" have recently appeared in outlets as varied as Business Week, the Reuters Financial Wire and the Motley Fool's Personal Finance and Investing Website.
For Prechter, it was a trip back through the time warp to the 1980s when he achieved guru stature by being among the few who saw the post-1982 bull market coming long in advance. He also succeeded in keeping his subscribers in the market for virtually the entire ride up to the August 1987 peak in the Dow of over 2700 and getting them out before the crash that October.
At that point, however, his career went awry. Prechter decided that the 'Eighties bull market had been a mania and that the 1987 Crash was just the opening act in a collapse that would send the stock market into a tailspin and the U.S. economy into a depression. And he has stuck to that forecast ever since, recommending the haven of treasury bills during a 13-year period -- 1987-1999 -- that saw the Dow and S&P rocket up some six-fold and the Nasdaq soar more than 10 times. While he claims -- and institutional clients confirm -- that he got a lot of other markets right during that period, including gold, collectibles, Japanese stocks and the dollar, it really doesn't matter. He'd missed the greatest show on earth.
It cost him big-time. According to numbers compiled by the Hulbert Financial Digest, Prechter's timing strategy from the end of 1982 through August of this year would have yielded an average annual return of 10.4%, compared with an average annual return of 13.1% for the S&P. The bear market of the past three years has muted some of the indexes' outperformance of Prechter. Nonetheless, the discrepancy in performance is yawning -- 599% compared to 1,025% -- after taking into account nearly two decades of compounding.
Likewise, the circulation of his monthly newsletter The Elliott Wave Theorist and ancillary publications collapsed to 4,000 from a high of 20,000 in 1987. The recent bear market, however, has helped push the number back over 7,000. His 70-person operation, headquartered on two floors of the former Dixie-Hunt Hotel in Gainesville, Ga., was only able to survive the slow times by attracting institutional clients to its short-term timing service in various stock indexes, currencies, interest rates, commodities, oil and the like.
It's easy to dismiss Prechter's forecasts on yet other grounds. His primary predictions over the past 14 years have been so outre as to put him in the extreme outlier of the super-bear camp. He thinks that the Dow, currently at 8400, will slide through 4000 by next spring on its way to an ultimate low in the range of 500 to 1000. Moreover, Prechter, who holds a psychology degree from Yale and who trained as a technician under the redoubtable Robert Farrell at Merrill Lynch, is convinced that the U.S. is headed for a shattering economic depression. U.S. industrial production and corporate profits will plummet, he predicts, and unemployment will rise to rates that will exceed the 25% jobless rate during the Great Depression.
He's somewhat tentative on the timing of this final Gotterdammerung (twilight of the Gods) for the stock market and economy. If the U.S. follows the contained, compacted pattern of 1929 through 1932, the final washout should come by 2004. Otherwise, it could take place later in the current decade of the new millennium, reminiscent of the U.S. stock market and economy's long day's journey into night between 1835 to 1842. Then again, Japan's 13 years of economic narcolepsy also argues for a longer-term denouement. Like any astute prophet, Prechter always leaves himself plenty of wiggle room.
Current conditions argue against his apocalyptic visions. For one thing, the economy would have to more than double dip -- it would have to fall off the cliff -- for his economic forecast to come to pass. Also the stock market is in the midst of a spirited rally of 15%-plus off the Oct. 9 lows.
But Prechter, whose calm manner stands in stark contrast to his apocalyptic message, insists that the latest rise is merely another bear market rally destined to flameout, as did the 29% jump in the Dow between September 2001 and March of 2002 and the 17.5% rise in the average from July to August of this year. Each was followed with a new low in the Dow, he points out. "This time around, I'm fighting a lot of seasonal and historic forces pushing the stock market higher," Prechter tells a visitor in his office, just off Gainesville's main square. Outside, a weekend festival is in full swing featuring bluegrass and country music, funnel cakes and boiled peanuts.
"October is typically a bear-killer month. We're at the bottom of the four-year and 20-year cycles, the decennial pattern bottomed this summer and we're going into the third year of the presidential election cycle next year which is traditionally good for stocks. Finally, we're on our way to our third year in a row of down markets which is almost unheard of. Yet despite all of this I feel good about remaining a bear. It's at least my belief that the wind is at my back."
Watching the waves
Prechter's grim predictions arise from a methodology called the Elliott Wave that many mainstream market commentators and economists regard at best as a meaningless projection of spurious patterns on random events and at worst as voodoo. The progenitor of the theory was an accountant and corporate reorganization expert by the name of Ralph N. Elliott, who spent his retirement years during the Depression and after studying the stock market. He died in relative obscurity in 1948, having produced just a couple of monographs and a smattering of stock-market letters. There was little interest in the stock market then with the Crash such a recent memory and real stock market returns so dreadful during the 'Forties.
Elliott Wave proponents claim that financial markets and, indeed, other economic, political, social and cultural trends are governed by recurrent and measurable waves alternating between optimism and pessimism -- confidence and fear. Man, after all, is a social animal who from primordial times survived by following the herd, say, in flight from a saber-tooth tiger.
Elliott believed in inherent human progress, but that it never came in a straight line. Mass psychology instead dictated that financial markets and all human phenomena follow a similar five step wave-advancing pattern of up, down, up, down and up. Counter-trend corrections in turn limn out a three-wave pattern. So altogether there are five steps up and three down in a complete Elliott Wave.
Elliott claimed to discern such identical wave patterns in time spans from less than an hour to market periods as long as a century or more. The waves occur on 10 to 11 different time scales, each one fitting like a Russian nesting doll inside the wave that's the "next degree" higher in size.
What has Prechter and his fellow Elliott adherents in such a white heat these days is the conviction that 2000 saw the climatic fifth wave of a grand super-cycle going back to the dawn of the republic in 1784, the super-cycle that began its ascent in the 1932 depth of the Great Depression, the cycle that started its rise at the 1974 market low, the primary cycle dating back to 1990 and the intermediate cycle from 1998. In other words, the five greatest degrees of Elliott Waves came together in one huge, portentous crescendo.
Stock markets are the most sensitive and earliest registers of shifts in mass psychology or, in Elliott jargon, "social mood." Bull markets are not only leading indicators of good economic times. They also issue in periods of international comity, free trade, tolerance, benevolence, upbeat popular music and films. Bear markets by contrast spawn protectionism, xenophobia, international conflict, class polarization, slasher and horror films, angry music, separatism and terrorism. It's social mood that dictates events and trends and not vice versa, however.
The sheer unconventionality of Prechter's market views makes him interesting and sometimes incisive. For one thing, Elliott Wave theory nicely ties the present to the past. It promises and, at times, seems to deliver big picture predictability. How else did Prechter sense with such conviction back in the late 'Seventies just before Business Week ran its famous cover proclaiming the "Death of Equities" that the stock market was about to explode upward?
The Elliott Wave's one major flaw, according to Prechter, is that it provides only the pattern and not the duration of market moves. Thus he's been frozen at the controls since the 1987 Crash waiting for a grand super-cycle fifth wave collapse to ensue because he thought that the 'Eighties bull market, similar in time span and amplitude to the Roaring 'Twenties bull market, constituted the full fifth wave. He had no historical reference points that told him differently.
But now Prechter is convinced that the fifth wave mania is over and the Big Kahuna of market collapse and deflationary depression is now bearing down on an unsuspecting America. The major market averages have all been in free fall since early 2000. This Spring saw the last hold-out, small cap stocks, give up the ghost. To Prechter, the pattern is now in place and the endgame begins.
Most important, claims Prechter, is the acknowledgement that over the past two decades an unprecedented bubble market extended far beyond the high-tech-dominated Nasdaq Composite. In fact the Dow -- whether measured from its low of 570 in 1974 or 777 in 1982 -- enjoyed an epic rise of 20 times and 15 times, respectively, to reach its record close of 11,750 in January 2000. No other stock market move comes close to this. The Dow only rose slightly more than fivefold in the 'Twenties, to 386 in 1929 from 63.9 in 1921; the Nikkei rose 11-fold between 1975 and late 1989, and the South Sea Bubble Market in England jumped eight-fold in just three years during the 1720s.
Yet some commentators still argue that the Post-1982 Bull Market was anything but a mania. They claim that much of the surge in stock prices was a reflection of solid economic growth, improved U.S. management techniques, the advent of productivity-enhancing technologies, the global triumph of free markets and liberal democratic values, and falling inflation and interest rates. Part of the bounce in stock prices also represented catch-up after 15 years or more of negative real stock returns and economic stagflation from the late-'Sixties to 1982.
Prechter finds such views ludicrous. Despite the fact that the post-1982 stock market dwarfed the bull market of the 'Fifties and 'Sixties, the economic fundamentals undergirding the latter period were far weaker than those underpinning the earlier era, he says.
The song remains the same
Take your pick of statistics. GDP, for example, grew at an average annual real rate of 4.5% from 1942 to 1966 compared to only 3.2% from 1975 through 1999. Industrial production? It showed an average annual gain of 5.3% in the earlier period, versus just 3.4% in the later period. The story is much the same for corporate profitability, capacity utilization and unemployment, among other measures. The earlier period trumped the later.
The same lackluster economic performance prevailed during other stock-market bubble periods, according to Prechter. Growth was much stronger during the Gilded Age of 1872 through 1880 and early industrial era of 1898 to 1906 than during the Roaring 'Twenties, for example. Japan enjoyed twice the annual GDP growth from 1955 to 1973 as it did during the subsequent 15 years of its celebrated bubble economy. Stock market manias are powered more by speculative fumes than by legitimate economic and corporate growth.
Ebbing market breadth is the final proof offered by Prechter that the post-1982 bull market was a bubble. During its 18 years of life, a far lower percentage of stocks participated in the surge of the averages than during the 1950s and 1960s. And the stocks that prospered in recent decades were more triumphs of financial engineering and manipulated expectations than companies producing real goods and services.
The point of all this to Prechter is that every past stock mania has ended badly, just as the latest bubble will. The average stock on the British market lost 90% of its value after the South Sea Bubble burst in 1722. Between 1929 and 1932, U.S. stocks dropped nearly 90% in value. During both periods many companies went out of business further damaging investors. The Nikkei and Nasdaq have both breached the 75% down barrier in recent months and will quite possibly reach a level 90% down from their highs at some point. A greater than 90% decline would take the Dow to below 1000 and the S&P to under 200. These numbers also happen to be Prechter's current targets for the two measures.
***********
He has made many mistakes and yet people still blindly use Elliot Wave. Beating the S&P consistently is the test of a trader. Pretcher and his Elliot Wavers have flunked this.
Jack |
|
