At the start of a new bull market investor sentiment is extremely pessimistic. It remains that way in spite of stocks steadily going up. Periodically, the market falls sharply, serving to confirm the pessimism, keeping investors out, usually for years.
The reverse is true when the bull market finally tops and a new bear market emerges. Extreme optimism reigns, and when the market jumps up frantically like it has since April 23, investors, still mostly fully invested, breathe sighs of relief, believing that holding on is the right thing to do. And holding on actually works during lesser reactions, which is one of the factors that conditions people to hold (they sold out in earlier crashes, so are damned if they’ll do it this time).
So, when the serious crash arrives-the mother of all bear markets-they are sitting ducks to lose everything. Aided and abetted by advisors, who employ forecasting methods that generate forecasts that tend to extrapolate the present trend (if it is up, it will continue up), they hang in until the pain is unbearable-usually after 60-70% of their wealth has disappeared. I am not making this up. I have a number of sources in my library that have catalogued historic investor behavior.
The Wave Principle is an entirely different way of handling markets. Based in the mathematics of the universe and developed empirically, it tends to forecast change in direction with a high degree of accuracy. While picking the absolute top is a challenge for the method, the probability of the forecasts is high and adjustments can be made when patterns so indicate.
As of today, the probability that the U. S. stock market has entered a bear market of the highest degree of Wave Principle trend is extremely high. The analysts at Elliott Wave International are calling for a bear market of Grand Supercycle degree. Such a market will destroy values more completely than the bear market of 1929-1932, which was “only” a Supercycle event.
The first impulse wave down, Primary Wave 1, began on February 12 of this year and descended in five waves, three down in the primary direction and two countertrend waves up between waves 1 and 3. Primary Wave 1 ended on April 23, and a three wave countertrend Primary Wave 2 is now compete or all but so. Here’s the picture:
This is the first time a complete five wave impulse wave of Primary degree has occurred since the Supercycle bull market that began in 1932 completed five Cycle degree waves up. This is powerful evidence that things are getting serious. The A,B,C countertrend wave since March 23 is complete in form, although the internal subdivisions could stand to pull the wave up a bit past yesterday’s high. It is also acceptable for the C wave to extend further upward, so long as it does not go beyond the all time high.
Anything can happen, of course, but the weight of evidence in favor of Primary Wave 3 down getting underway soon is the strongest I can recall.
The next wave down, the third wave in a five wave impulse move is generally the longest, strongest, and in the case of a bear market, the most violent. We need to be prepared for this.
The point of this essay is that Wave analysts, by reconstructing charts of organized capital markets from the original seventeenth century Dutch market through the British continuum to the American market have long identified perhaps the most valuable forecast of all: Once a major market top is in place the Wave Principle identifies with great precision the level at which the bear market will bottom, giving us the measure of the losses expected during the decline, and the level at which to reinvest again with minimum risk.
If the Dow Jones Industrial Average began a Grand Supercycle bear market by topping in February at 29,568, the bottom of the first wave down, the one we will be concerned about, will be below 3,800, an 87% loss. Time cycles suggest that this low could occur in 2022, plus or minus one year. From there, a 5-10 year advance would be very profitable, after which a final decline to below Dow 400 would bring in the final low, perhaps 20-30 years out.
In short, the best way to deal with this forecast is to be in cash or short term Treasury notes until the first bottom arrives, and then reinvest safely in a thoroughly sold out market for a few years.