Working Without a Net

… just tryin’ to make the right mistake…

                                            —The Band

 I’m looking to do an end run on the behavior model, here. The standard is to learn about a thing by stepping in it. Market pros will tell you everything they know came out of the dumb ass losing trades they made over and over again ’till they finally got it right. But something larger than your ordinary market correction is looming dead ahead and I don’t see the opportunity for a light learning experience to prepare for it. Let me explain:

About a hundred years ago, Charles Dow observed that bull markets advance in three moves. He was not clear on the amplitude, the depth of the ensuing bear market, or, for that matter, the role market fluctuations play in a society’s development. Then, in the 1930s, Ralph Elliott saw that a bull/bear cycle involves the three legs up, interspersed by two corrective contra moves, and then a bear market which involves two legs down with a fakeout rally in between.

Further, Elliott noted that this sequence, five waves up followed by three waves down occurs at multiple degrees of trend, from sequences lasting just a few hours all the way up to what he labeled Grand Supercycle Waves that cover hundreds of years. When Charles Collins studied Elliott’s work, he saw that the waves were related with Fibonacci ratios. Fibonacci numbers are the most ubiquitous mathematical relationships in nature. This led Elliott to conclude that the ebb and flow of organized markets is a natural expression of society’s growth pattern and he named his hypothesis Nature’s Way.

So, if you look closely, you can see that the market evolves as a fractal, with cycles within cycles. And, here’s Elliott’s most critical observation: when a bull market sequence of five waves up is complete, the three wave bear market will come down to the fourth wave of one lesser degree of trend. Confusing, but stay with me.

In 1978, Frost and Prechter organized Elliott’s notes in their book, Elliott Wave Principle.They had been studying Elliot’s works for some time and concluded that, contrary to what every conventional analyst on Wall Street was saying, a great bull market was just getting underway that would be the greatest move in history. That has taken place. They further said that, after the completion of the bull market, which they labeled Cycle Wave 5 within the Gran Supercycle Wave that had begun 300 years earlier, the ensuing bear market would take prices back to the area of Wave 4 of Supercycle Wave 5 (one lesser degree). That wave was the bear market of 1929-1932. Hence, the target for this decline is all the way back down below Dow 1,000.

Hard to swallow, I know. For a comprehensive review of the particulars, call Elliott Wave International, 800-336-1618, and ask to buy the August 2011 issue of Bob Prechter’s Elliott Wave Theorist.They will e-mail you a pdf file that contains a link to Bob’s video presentation of the issue. Or, just get the hell out of the market and forget about it.

All the variables are in place now for a sickening, five-year, slide in the value of every asset class, reducing 401ks to bitter ash. Not least of these variables is extreme optimism on the part of market professionals. The weekly sentiment polls indicate that investment advisors are even more bullish now than at the 2007 top. Hedge fund managers have a record commitment to stocks. Mutual fund managers hold their near lowest cash reserves since records have been kept. You will find this difficult to believe, but these clowns are always most pessimistic just before the start of a major advance, and most optimistic just before a collapse. It’s going to be a bloodbath.


Investors who have never been through a bear market blithely greet their first one fully invested and unprepared because they have no reference point. Searching for something to draw from for an investor I was talking to the other day, I said, “What were you doing between 1969 and 1974?”  “Nothing”, he replied, “I was born in 1974.” Oh. Makes it hard to relate.

I was too young to have serious money invested during the bear market of the seventies. But my clients were fully invested and nobody called down from headquarters to tell me to get them out. It’s hard for me to convey how it felt, but try this: watch the opening scene of Saving Private Ryan again. Home in on the soldier who got hit 10 yards after he came ashore on Omaha Beach. He’s sitting in the sand, looking down at his blood drenched clothes and his entrails as they spill out of his gaping stomach wound onto his lap. Look at the expression on his face. It’s not terror. It’s disbelief. Total disbelief. That is what it is going to be like.



The author makes no representation as to the accuracy of the quoted material, but believes the sources to be reliable. No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.


This entry was posted in Essential Essays, On Markets. Bookmark the permalink.

Comments are closed.