Let me preface this by saying I have never studied Elliot Wave theory so I can't comment much on it, but the proponents of this analysis are probably only lagging behind gold bugs in terms of their belief :) I was hoping Robert Prechter had a market call in this Bloomberg story because he was about 2 weeks early in calling for shorts to reign themselves in (effectively an intermediate bullish call) in February [Feb 24, 2009: Robert Prechter of Elliot Wave Fame Advises Closing Shorts]

Elliott Wave International Inc.'s Robert Prechter, who advised shorting U.S. stocks three months before the bear market began, said investors should end that bet after the Standard & Poor's 500 Index tumbled to a 12-year low. He warned of a sharp and scary rebound for anyone still wagering on a retreat, according to this month's Elliott Wave Theorist. The market is compressed, Prechter said in the note published yesterday. When it finds a bottom and rallies, it will be sharp and scary for anyone who is short. I would rather be early than late.

In July 2007, Prechter advised shorting U.S. stocks, saying aggressive speculators should return to a fully leveraged short position. He has now reversed that call.

In retrospect, despite the market falling hard for another two weeks (I tried to get long one week after Prechter's call, and promptly got whipped) in the longer term view it was a good call -- being correct within 2 weeks is solid in my book. And indeed it was scary to be short!

Unfortunately this piece is not making a near term call one way or the other but if you believe it id=BLOGGER_PHOTO_ID_5336080715532599346- all I can say is ... Danger, Will Robinson

  • Robert Prechter, known for examining stock charts to make market forecasts, says dividend payouts, the ratio of share prices to earnings and dwindling cash at mutual funds mean U.S. equities may plunge as much as 80 percent.
  • The 43 percent drop by the Standard & Poor's 500 Index since October 2007 hasn't taken prices to levels typical of the beginnings of bull markets, according to Prechter, the founder of Elliott Wave International Inc.
  • Have we fallen far enough on this to say that the bear market's probably over? Prechter, who expects the stock market to lose half to four-fifths of its value, said at a meeting of the Market Technicians Association in New York yesterday. On our model, there should be more to come.
  • The dividend yield for the 30 stocks in the Dow Jones Industrial Average is too low at 3.71 percent, he said, citing an analysis of prior market peaks in 1929, 1966 and 1977. We have a long way to go to where the market may be at bear-market-bottom yields, he said. Valuation measures including price-to-earnings, price-to- book value and bond payouts relative to dividend yields are also still too high based on historical averages, Prechter said.
  • Mutual fund managers have less than 6 percent of their assets in cash, another indication that there isn't enough buying power to sustain a long-term rally in stocks, Prechter said.
  • Based on the amounts of cash fund managers had at the start of bull markets in 1974, 1982 and 1990, we should be expecting double-digits for a really good bear-market bottom, Prechter said. (but all I hear on a daily basis is all the mountains of cash waiting on the sidelines to enter the market?)
  • The price-earnings ratio on the S&P 500 was about 60 at the end of last year, based on 2008 profits, according to data compiled by S&P. In prior bear-market lows, the measure sank to 6 or 7, Prechter said. That gives you a flavor for how much the market's going to have to come down, or earnings will have to suddenly soar, he said.

But of course there are different price to earnings ratio - you can use the bulls or the bears; whatever fits your world view

  • There are different measures of the price-to-earnings ratio. Yale University Professor Robert Shiller tallies the figure using 10 years of profits to smooth out short-term fluctuations. His current reading is about 15.7, near the historic average of 16.3 going back over the past 128 years, according to data on his Web site. Shiller's P/E ratio got as low as 5.6 during the Great Depression.

In you are unfamiliar with this type of tea leaf reading (I use that term with affection)

  • Prechter, the 60-year-old advocate of a theory of market analysis developed by accountant Ralph Nelson Elliott during the Great Depression, achieved fame in 1987 for predicting that year's crash two weeks before it occurred. He's published a monthly newsletter, The Elliott Wave Theorist, since 1979.
  • Elliott Wave Theory holds that market trends follow a predictable, five-stage structure of three steps, or waves, forward, two steps back. In addition, the waves share a variety of features: Wave two never falls below the starting level of wave one; wave three is never the shortest; waves one and five tend to be of equal length; and wave sizes are often related by a series of numbers known as the Fibonacci sequence, wherein each number is based on the sum of the two previous ones.

To finish

  • Prechter, the author or editor of 13 books on forecasting, also argues that markets are fundamentally driven by social psychology. (agree) The current trend toward saving and avoidance of debt is leading to an economic depression and deflation, he said. (it certainly is a most fascinating economic experiment we are in - how it turns out will be just as fascinating when we look back in half a decade)

EDIT 12:45 PM - I see more here from Reuters

  • Longtime technical analyst Robert Prechter, who forecast the 1987 stock market crash, predicted this week that U.S. equities may plunge to half their lows hit in March as a deflationary depression bites.
  • Oil and U.S. Treasury bonds are also locked in long term bear markets, while corporate bond prices will plunge precipitously by next year as broad economy, banking system and company earnings sustain more damage from a financial crisis that's akin to the Great Depression, he said. (hmmmmm... he is firmly in the deflation camp with Mr Hugh Hendry)
  • It's not the start of a new bull market, said Prechter, chief executive at research company Elliott Wave International in Gainesville, Georgia. Our models are (showing) right now that it is a much bigger bear market than most people realize, something along the lines of 1929-1932, he told Reuters in a wide ranging interview. It's a very rare event, he added.
  • I think the next leg down will be at least as severe if not more severe than what we just experienced. So you want to stay on the side of safety, he said. As in his 2002 book Conquer the Crash, which warned of the dangers of a U.S. debt bubble and deflationary depression, Prechter continues to advocate safer cash proxies such as Treasury bills.

What about all the commodity bursting higher on green shoots?

  • Riskier assets such as commodities, corporate bonds, and stocks which are currently anticipating that the severe global economic downturn may be bottoming, are likely to have short lived intense rallies, but within an inexorable long-term decline that may last another seven years, he said.
  • As banks continue to accumulate losses and corporate earnings fall, the difficulties will probably last through about 2016, he said. There will be plenty of rallies along the way.
  • Oil may rally further from current levels just below $60 per barrel but the upside will be capped at about $80 per barrel as the commodity is locked in a long-term bear market, he said.
  • Deflation is coming, it's going to lead to a depression. We're not at the bottom yet, Prechter said. I think we are going to have bouts of deflation separated by recoveries.
  • Prechter also painted a bleak picture for commodities like silver and is largely unenthusiastic about gold, believing the precious metal made a major peak when it rose above $1,000 last year.
  • Treasury bond prices are likely to fall in a long term bear market, with huge government debt issuance being the main catalyst. People got very enamored with bonds and very enamored with gold and I don't like to be invested in markets that are over subscribed, Prechter said.
  • The Treasury (Department) has taken on so much bad debt at a time tax receipts are falling, that there will be a slow, but very steady change in the way people will view the U.S. government, said Prechter. As a result, investors in Treasury notes and bonds will ultimately demand higher yields, he said.
  • The U.S. central bank will not be able to control the government bond market and prevent yields from rising, regardless of how much money the Fed uses to buy Treasuries, he added.
  • Next year, U.S. corporate bond prices will probably fall below their extreme price lows of December during the market panic of 2008 when investors fled riskier assets, he said. Corporates in terms of price have the big wave down coming. This has been a prequel, Prechter said. Many corporations who (now) say we can borrow more money and take more risks: those are the ones who will get in trouble, he said. Many municipalities will default, he added.

This will be fascinating - if he gets all this correct, I'll convert to whatever he is selling.