S&P 500 Falling to…92?

We’ve been looking recently at a potential head-and-shoulders formation in the S&P 500, with the left shoulder being the January peak at 1150, the head being the April peak at 1220, and the developing right shoulder likely to be around 1150, too. There’s fierce debate as to when we’ll see that right shoulder, but that’s not the point of this article.

Let’s turn to Robert Prechter and his Elliott Wave Theory letters. He’s been in the business a long time, first making a name by going bullish in 1974 when everybody was gloomy. Although it took eight years for that call to bear fruit, it eventually did in a big way. His Elliott Wave Financial Forecasts accurately called for a rough 2008 and positioned itself to be one of very few services to end that year with a profit. He went on to proclaim that “2010 is the year when the bear market in stocks returns in full force.”

Last month, he wrote, “The topping process is over for the countertrend rally that started in the first quarter of 2009. The next leg lower that commenced in April should now deliver a decline that will ultimately be bigger than the 2007-2009 sell-off.” He doesn’t see it bottoming until — get ready for this — 2016. He wrote that the “most likely profile is a stock market crash of historic proportions” because: “This bear market is of Supercycle degree, the biggest since 1720-1784. It should therefore include a decline deeper than the 89% decline of 1929-1932. A decline of 91.5% or more would carry [the Dow] below 1000.”

A 92% drop in the S&P 500 from an 1150 right shoulder would see it bottom at 92. Yes, 92. If all stocks followed that proportion, we’d find Google at $40 and Intel at $2. I’m fairly sure stocks would be the least of our concerns in such an environment. My letter might have to change focus to home reloading and sustenance gardening, seeds mailed monthly.

The only way to get more dire than Prechter is to say the market will disappear. There’s an easy forecast to remember. Even Prechter, however, doesn’t think we’re heading to a low in 2016 with no reprieves. He wrote, “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.”

See? Not all bad.

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  1. Ian
    Posted June 24, 2010 at 11:09 am | Permalink

    Yes I agree. But I find that if something is out on timing for that amount of time… the information is useless from an investment/trading perspective (particularly the latter).

    For instance, if you maintain trailing stops on asset values… you can ride trends and protect downside.

    The danger with Prechter is this: Timing is not his forte, but his whole method purports timing to be it’s prime strength (complete with extremely precise dates being forecast ahead of time). Nothing could be further from the truth, and held to account his method does not hold water. (I have been told of numerous of these dates from an associate of mine in the past year. I can’t remember even one being correct).

    Prechter PERSISTS in the commitment of a belief even in ther face of the market telling him otherwise. He is not a trader, but this is how he puts himself forward. This is where I take issue.

    All else aside, if the aim of investing is to make money… following Prechter’s advice would have left you relatively worse off that following the crowd. DESPITE volatility.

    YES, various commentators warned of imbalances from 2004 – 2007 and were right. Equity values dropped to 2004 levels. But they are now at 2005 levels. It’s been a wild ride, and if you used trailing stops as discussed (if only on the S&P500 for general market timing) you would be far ahead of Prechter (and likely the whole market).

    Furthermore… does Prechter run a fund? I have looked for it but have not found anything.
    I am willing to bet that the answer is “No”, and if it is not… I’d love to see the 1, 5 and 10 year returns.

  2. Ian
    Posted June 22, 2010 at 2:36 pm | Permalink

    (broker = broken)

  3. Ian
    Posted June 22, 2010 at 2:35 pm | Permalink

    Anyone subscribing to the ideas pushed by Elliot Wave theory should read the below article.

    It is a fantastic website, with even Jason Kelly on it (which is why and how I found this site).

    Beware that Prechter’s forecasts seem to be right “eventually”, but on balance his timing is amongst the worst out there. 26% accuracy – below average. A portfolio following his advice would have been a massive underperformer. Sure he’s been right in the past, but if you can find a better definition of “a broker watch being right twice a day”… I’m all ears.


    • Posted June 23, 2010 at 11:16 am | Permalink

      That’s true, Ian, but Prechter specializes in the big calls. It’s hard to say whether somebody warning about a major crisis or opportunity brewing is wrong in the lead-up or right in the eventual occurrence. Performance-tracking sites have to juggle this, and it’s harder than it appears with more subjectivity than this numbers-based business implies.

      For example, was a guy wrong to warn about growing imbalances in the US housing market from 2004 to 2007? During those several years when it didn’t matter, anybody following the advice to get defensive in the stock market was chided. Who got the last laugh there, though?

      I’m not claiming that Prechter is right or wrong this time around, and I even acknowledge in the article that his famous 1974 call was “wrong” for eight years. Yet, we have to admit that there are plenty of reasons to think the US is on a shaky path and that it might be worth at least keeping part of an eye on what Prechter and other long-term forecasters are saying.

  4. Gaby
    Posted June 22, 2010 at 10:52 am | Permalink


  5. Joe P
    Posted June 21, 2010 at 10:40 pm | Permalink

    I hope this was a joke to kick the week off with a laugh. You pretty much tore the Elliot Wave a new one in “Neatest Little Guide to Do-it-Yourself Investing”~!

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