Friday, June 18, 2010

Sub 1K DOW?

Back in a March 2009 post, DOW: A Historical Perspective, I created and posted up the chart below - pondering the ultimate DOW downside "potential". (click image to enlarge)

Though I also pointed out severely oversold conditions and called for an eventual rally (at that time), the main purpose of that post was to highlight that even though the DOW had been cut in 1/2, there was still much more room for it to eventually fall (back to the long-term trendline - in the high 1K area)

Well, it looks like I'm not the only one with such a bleak outlook. Marketwatch carried an article yesterday that predicts it will eventually fall BELOW 1K

"Elliot Wave predicts triple-digit Dow in 2016"

NEW YORK (MarketWatch) -- An investment letter that called the Crash of 2008 said that this would be a bad year -- and it now says it will get worse.

A whole generation of investors think that Robert Prechter and his Elliott Wave Theory letters, Elliott Wave Financial Forecasts and Elliott Wave Theorist, are permabears. And they've certainly seemed that way for the last decade.

But Prechter was very bullish after the 1974 low and, briefly, after being one of the very few services to make money in 2008. Then he announced that "2010 is the year when the bear market in stocks returns in full force."

Elliott Wave Financial Forecasts (EWFF) makes recommendations specific enough to be tracked by the Hulbert Financial Digest. (The Elliott Wave Theorist is too, well, theoretical.)

How bad?

The clearest statement comes from the Elliott Wave Theorist, discussing a numerological technical theory with which it supplements the Wave Theory's complex patterns: "The only way for the developing configuration to satisfy a perfect set of Fibonacci time relationships is for the stock market to fall over the next six years and bottom in 2016."

"Stock market bulls and most economists think that a new bull market and economic recovery are underway. Most bears are looking for either a long sideways bear market à la 1966-1982, or a hyperinflationary run to infinity. Our Elliott Wave outlook opposes both of these scenarios. The most likely profile is a stock market crash of historic proportions."

Elliott Wave Theorist offers several reasons, including: "This bear market is of Supercycle degree, the biggest since 1720-1784. It should therefore include a decline deeper that the 89% decline of 1929-1932. A decline of 91.5% or more would carry it below 1,000."

There will be a short-term rally at some point, thinks Prechter, but it will be a trap: "The 7.25-year and 20-year cycles are both scheduled to top in 2012, suggesting that 2012 will mark the last vestiges of self-destructive hope. Then the final years of decline will usher in capitulation and finally despair."

Though completely outside the realm of any mainstream market forecast, I figured it's an idea worthy of your consideration nonetheless.




Anonymous said...

Your numbers are surely correct, but are analyzed improperly.For the short term, one can look at growth arithmetically. Over longer periods, growth must be looked at logarithmically. For example, if in 1800, 100 hammers were made, and in 1810 200 were made, one could use either an increase of 100 or 100%. In 1900, if 1000 were made and in 1910, 2000 were made, your graph in numbers would begin to look strange. In 2000, with 1,000,000 made, and in 2010, instead of a double in 10 years, only a 10% gain would be 1,100,000. But the gain in numbers of 100,000 would swamp the earlier numbers. Use a log scale instead.

BxCapricorn said...

I agree with Anon. We live in a Keynesian World and you keep attempting to apply Austrian School rules to it. In a linear, supply v. demand World of economics, money and production cannot expand like this, but the world most certainly does. In your own field, how much computing power was there ten years ago? How many cell phones could be supported by a single tower? How much power was consumed? You may argue that technology and economic expansion cannot be compared, but I disagree. As the World's Reserve Currency and supplier of the liquid that runs the World, we cannot confuse inflation (though we're still deflating this year) with hyperinflation. Reserve currencies cannot hyperinflate, as they are backed by World commodities. You'll see this when Gold and Silver top out this summer, and plummet again.

Anonymous said...

BxC: So what you are saying is...the Gov can print all the money it wants and there will be no inflation.

Wow... that is great... they should do that and raise the min wage to $1,000,000 an hr and we can all be rich.


Jb said...

@ BxCap: Gold and silver top out this summer?

I can see silver going sideways as long as the CTFC stays on a leash and silver eagles don't go on a six month back order.

However, with regards to gold, I think FOFOA and Mike Maloney are correct. Once the fiat currencies begin to collapse, everyone seeking to preserve their wealth will panic and run to gold. I wish I could buy more.