No Looking Back

All I say is by way of discourse, and nothing by way of advice.
I should not speak so boldly if it were my due to be believed

–Montaigne

The principal role of the market analyst is, or ought to be, identifying tops and bottoms. Armed with this knowledge, the investor can deal with the uncertainty of the markets by putting the probabilities in his favor.

Bottoms are easy. There comes a point when the data clearly indicates a universal perception of risk. There is no longer any risk because the players, fully convinced of risk, have acted and liquidated. No one left to sell. Time to buy.

Tops, on the other hand, are the devil’s device, created to frustrate the best of analysts. This is because the optimism that drove the market to its obviously overvalued levels will not go away. It dies a slow death, also frustrating the knowledgeable investor who has long since liquidated and stands on the sidelines for what feels like an eternity, looking like a damn fool.

The Elliott Wave Principle is, I believe, the most efficacious tool for forecasting tops and bottoms because it provides the analyst with a perspective on the oscillations in degrees of trend. In other words, a Supercycle top implies one degree of downside risk, whereas a Grand Supercycle top has greater magnitude, which prepares the investor for greater risk. Good as it is, it nevertheless is no less frustrating than any other method at important tops.

The present is a case in point: the secondary rally, the one that sets up the final decline into the ultimate lows, can retrace anywhere from 50 to 138% of the first decline (EWP, page 89), and it is really guesswork all the way up. “Are we there, yet?” will be asked every week, and there will often be plausible reasons to say, “Yes, this looks to be it!”

Thus, top picking by Wave analysts has been going on since the market crashed to the first bottom in March 2009. And for long suffering sideline investors, yet another moment has arrived to hear Wave analysts say, “This is it (maybe).”

The September 19 closing high of 17,279.74 in the Dow Jones Industrial Average was two points shy of 17,280, a 138% retracement of the 2007-09 drop. Time, price, sentiment, valuation and momentum all align to give us the final top, which managed to take up all of the potential in the studies. The decline since then appears to have been an impulse wave and the rally on Friday looks to be part of a normal reaction which should run out of steam somewhere between 17,200 and the top.

This is a good time, then, to review what the Elliott Wave Principle tells us we should expect over the next 7-10 years:

1) A bear market of Grand Supercycle dimension which will take the Dow Jones Industrial Average all the way back to the area of the 1929 top: 400, a 98% loss of value. No stock, not even Apple, or Wal-Mart will survive.

2) A depression more severe than the Great Depression of the 1930s, bringing on crashing values in all asset classes, including real estate and commodities.

3) Civil unrest, and pressure for radical political change.

I can see two ways to manage an end run around this period:

1) Hold cash, as it will gain astronomically versus the crashing values of stocks, bonds and real estate,

2) Hang loose, maintaining a good attitude during the duress, recognizing that out of this awful period the markets and the nation will recover and come back stronger than ever. We always have.

Cheers,

Rod

No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.

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