(MarketWatch) – Proponents of a weird investment theory say another crash is coming. Even weirder: they were right last time.
By Peter Brimelow, MarketWatch
I wrote my first MarketWatch column on Robert Prechter and his family of investment letters devoted to the esoteric Elliott Wave theory. ( See April 26, 2002 column.)
It got a lot of very angry email. Prechter’s superbearishness was very unpopular, and that time very unprofitable. I judiciously pointed out that Prechter was trying to spot junctures, the hardest of all market tricks, and noted “the prize for calling one of these epochal shifts is enormous, as it was in the early 1980s” — when Prechter had been an early bull.
It took a long time. But it happened during the Crash of 2008, during which the Elliott Wave Financial Forecast was one of the very few letters to make money. ( See Dec. 18, 2008 column.)
For a while, it looked as if the Elliott Wave was on a roll (if waves can be on rolls). EWFF was one of the first letters to call for a stock market rebound. ( See March 4, 2009 column.) In mid-summer, it argued that the Dow could reach 10,000 — but that the bear market would then resume, ending in devastating deflation. ( See June 29, 2009 column.)
Well, the Dow did reach 10,000. What now?
EWFF didn’t benefit fully from its prescience because it baled out too soon. ( See Aug. 31, 2009 column.) Over the past 12 months, EWFF is down 5.05% by Hulbert Financial Digest count, versus a 28.3% gain for the dividend-reinvested Wilshire 5000 Total Stock Market Index.
Note, though, that over the past three years, the letter is up 3.8% annualized versus a negative 5.25% annualized loss for the total return Wilshire 5000. And over the past ten years, the letter is up an annualized 1.39%, versus negative 0.27% annualized for the total return Wilshire 5000. Many more popular letters have done much worse.
What happens now could hardly be worse, according to EWFF. It says: “2010 is the year when the bear market in stocks returns in full force.” It compares the situation to the short-lived rebound after the initial break in 1929, and says that “a meaningful close” below 10,489 should see a similar collapse to new bear market lows.
EWFF also expects the spread between high and low-grade bonds to experience “a record widening” and thinks gold will fall “below $680.” It does expect a rally in the dollar, but that is merely an aspect of deflationary forces getting out of control. Prechter argues, referring readers to his recent book “Conquer The Crash,” that the yield on Treasury bills might actually become negative and for that reason advocates holding greenbacks.
It’s difficult to summarize quite why all this is going to happen because Prechter and his colleagues explain it in terms of their complex cycle theory — which, however, is subject to readjustments and reinterpretation. This is one reason that Elliott Wavers are so roundly disliked by so many investors.
Some good news, though: Prechter says his cycle work suggests that stocks and gold will finally bottom in nominal terms in 2014. After that, gold will outperform stocks. This, he writes, “may indicate a political decision, to be made at that time, to force inflation through currency printing.”
Elliott Wavers place a lot of faith in parallel social developments. EWFF writes that gold, which it describes as “a bull market sport,” is going into decline although those involved don’t realize it:
“At this point, for instance, NIKE Inc. /quotes/comstock/13*!nke/quotes/nls/nke (NKE 64.18, -0.53, -0.82%) is sticking with Tiger Woods and investors are sticking with Nike. The stock pushed to a new recovery high of $66.62 a share on December 31, which is not far from its all-time high of $7060 in March 2008. It’s still a great place to exit the stock.”
Source: Market Watch
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