Dow 1000? or Dow 20,000?

December 3, 2001

INTRODUCTION

Recently the Dow Jones 30 Industrials have been hovering about the 10,000 mark. Both the Wall Street analysts and most investors remain in a bullish mood. The small group of bearish investors can hardly believe what they are seeing. In a great recent article on www.cross-currents.net, experienced broker/analyst Alan Newman used these very discerning headline statements:

  • "The truth is that manias die hard ...."
  • "The recognition phase of the bear market has not yet occurred"
  • "Sentiment is clearly still as optimistic as it would be at a major bull market top"
  • "…the dream of riches from NASDAQ's "growth" stocks is still alive"

Since year 1995 when I read Robert Prechter's earth-shaking book "At the Crest of the Tidal Wave", I have been mentally prepared for the Dow to reach or go below 1000. But at that time I had little or no understanding of Elliot Wave theory or of the extent of the stock mania yet to come. Please read and reread the Elliott Wave section given below.

In October 1997, I gave an illustrated talk on the history of Stock Market Manias to a group of friends and fellow retirees. From my reading for this talk I had learned that every completed world mania had ended below its starting level. I showed the amazing charts of the 1637 Tulip Bulb Mania, the 1720 South Sea Bubble, the 1929 Wall Street Crash, the 1962-74 Value Line Composite Go-Go mania and the 1997 crashes in Hong Kong and Malaysia. There were few in the audience that day who were inclined to accept the idea that the Dow would ever return to its starting level of 1,000. And little more than 2 years later, with the Dow nearly doubled and the NASDAQ more than quadrupled, Dow 1,000 seemed impossible and Dow 20,000 seemed almost probable.

The 12-year on-going Japanese bear market/depression has dropped from 39,000 yen to 10,000 recently with no end in sight. Now, 20 months from the Dow market peak and with all major indices down 15 to 60%, the bulls are still in charge, urging investors to buy now for the great rally due next year. Mutual fund assets increased over the last 12 months and there is no sign of investor panic. The "buy and hold till retirement" philosophy propounded so eloquently by Wall Street has millions of investors captivated by the bull market mania. In the past week, with the Dow up 20% from its September 21 low, CNBC was calling it a new bull market since, if a 20% drop signaled a bear market, the reverse must also be true. Market veterans recognize this kind of drivel as just part of the unrelenting sales campaign in the media.

ROBERT PRECHTER AND THE ELLIOTT WAVE THEORY

It may seem a little strange to some, but the fact that there is still little investor fear and no signs of a real panic has strengthened my belief in the validity of Prechter's 1995 prediction of 1000 on the Dow. It is now quite apparent to me that we are in the slow process of making a gigantic top in the stock market. This belief comes from the great research work of Prechter and other Elliott Wave experts who have studiously traced the current top to a more than two century old wave that commenced in the London stock market in 1784. Elliotticians have named it as Wave 3 of the 5 wave Grand Supercyle degree. Wave 1 of this cycle ended in the 1719-22 London mania and wave 2 was a 62 year bear market ending in 1784.

Prechter has projected that the current bear market, Grand Supercycle Wave 4 of a larger formation, will last for many decades and will include at least 3 huge bear market phases that are separated by equally huge bear rallies, each of which will at the time appear as bull markets. Since Grand Supercycle Wave 3 started 216 years ago, the full corrective process should take about 100 years or more to complete.

The big picture described above will always be hidden from the investor masses who know nothing of the Elliot Wave theory. The great majority of uninformed investors will never be able to see the big picture because each wave in the 5 wave Grand Supercycle sequence is composed of many sub-waves in progressively smaller time cycles. So the world as a whole will be busy with each smaller bull and bear cycle as it unfolds.

Discovered by Ralph Elliott about 70 years ago, this great theory has now been recognized as a phenomenon found in nature and in social events apart from the financial markets. Elliott Wave theory holds true for waves measured in seconds, hours, days or centuries. It is related to a new branch of mathematics called Fractal Geometry. In its broad scope, this theory resembles the grand theory of the physical world that intrigues our great nuclear physicists. For a further explanation of this subject, I highly recommend the book, The Wave Principle of Human Social Behavior as well as current reports available from www. elliottwave.com.

Once your mind becomes accustomed to the idea of a 200 year great bull wave 3 in a 500 year 5 wave bullish Grand Supercycle, as has resulted from my 5 year study, it is a rather small next step to accept the present snail-like bear market now unfolding. It's not easy to pull your attention away from the hour-by-hour turmoil on Wall Street but the effort is worthwhile for serious investors. In fact, it may be very important to your personal financial welfare.

Several bearish experts are predicting a bear market bottom for the 2003-2004 time period. Very few of those offering such opinions at this time have a grand concept that embraces a multi-decade bear market in which the first bottom is just one in a succession of bear market bottoms. It takes some real out-of-the-box thinking to imagine a bear period that may require much of this century to complete.

I have been a lonely bear for most of 5 years and, at age 86, do not expect to outlive this bear market. With my reading of history, I do not have any problem seeing the Dow drop to 1000 or even lower. With Japan's bear market now 12 years old and our government following the same misguided plan of action, I see nothing to change my current views.

The perma-bulls on Wall Street seem now to be lowering their sights well below the Dow 20,000 level. How long will it take to bring general recognition that we are in a severe bear market? How long will it take to bring massive redemptions of mutual funds assets? How long will it take for still bullish investors to reach the fear level that causes a "sell at any price" panic? How long will it take for buyers to disappear from the market? How long will it take for Wall Street to become a desolate area. I saw all these stages happen in the relatively minor 1972-75 bear market and expect it will be much worse this time.

RECESSION OR DEPRESSION?

I spent the Great Depression years of 1929-1939 completing my high school education and 8 years of college. To this day, I retain a vivid memory of those hard times. Few people today know that this depression might have lasted indefinitely if the tremendous economic buildup for World War II had not occurred. The actions taken before 1939 by our Washington leaders to resurrect the very weak economy had proven of little or no value. After the war, memories of the depression faded away with the death of the older generation. Business cycles through the last half of the 20th century, were fairly mild and the idea grew that our government had all the tools needed to prevent a depression. Eventually the word "depression" fell completely out of use in the media.

Since the current economic slump began we have heard only the word "recession" and a mild one at that.. First it was predicted to be "V-shaped," then "U-shaped." Recently suggestions that it might be "L-shaped" have appeared in the media. But some shrewd observers have been comparing the current situation to that of 1929-1939 and lo they find a great resemblance, step by step down from the peak. Will the forbidden D word return to our vocabulary? In his magnificent 1995 Tidal Wave book, Robert Prechter did not mince his words , quoted below:

"Markets that began declining early will continue their descent to depths currently inconceivable to conventional observers. The giant wash will take with it wholesale prices, consumer prices, employment, profits and tax receipts, as well as the fortunes of banks, manufacturers, insurance companies and pension funds. Ultimately, the process will devastate the debt balloon, the welfare state, the solvency of municipal and federal governments, and the political status quo."

Nothing that has happened since 1995 would require Prechter's words to be retracted today. Here is a direct quote from his November 2001 Elliott Wave Theorist:

"While economists debate whether or not the United States is in a "recession" all the studies reported in EWT over the past twenty years have led to the same conclusion: Following the Wave V stock mania, we would experience not simply a recession but a collapse into depression that will be more severe than the great depression of the 1930's."

The Wave V referred to above is the final wave of the five wave Supercycle which is at one level below the Grand Supercycle. It is also the fifth and final wave of the Grand Supercycle Degree Wave 3. This wave started at the 1932 bottom and ended in 2000.

FINAL WORDS

For those readers who are new to the Elliott Wave Theory, the Prechter quotes above may seem scary and almost unbelievable. But, at a minimum, I hope that all readers will think seriously about the implications for their financial future. There is a large body of fine, published research on all aspects of the EW theory. I do not have any figures on the number of investors who are currently using this great timing tool, but it must be a very small percent of the total. This small number of EW followers creates many opportunities for all independent thinking investors.

EW signals have been used successfully for very short day trading of commodities and other financial instruments. I have been using it for intermediate trading of stocks and mutual funds and could not imagine risking my capital without it. It could be used to tremendous advantage for very long term market timing and capital preservation. Elliott Wave followers in that low risk category are probably now in a very, very safe allocation of assets. It is prudent for investors of all ages and experience levels to hope for the best and prepare for the worst!

A gold nugget can be worth three to four times the value of the gold it contains because they are so rare.