Over the Falls

Market wags like to say “sell in May and go away.” They got it right this year. For the month, The Dow Industrial Average was down 6.2%, commodities (CRB Index) down 10.8% and oil fell a whopping 17.5%, a stunning, but not unexpected return of the overall asset deflation forecasted by the Wave Principle.

The drop from May 1 into Friday’s (June 1) close in both the DJI and the S&P 500 traced out five clear waves, turning the primary trend back down in the start of Primary Wave 3 of cycle wave C, an especially violent phase of decline. If the analysts at Elliott Wave International are making the correct call, a short term bounce is due soon, to be followed by a heart stopping collapse:

This quote from Frost and Prechter’s Elliott Wave Principle is instructive: “C waves in declining markets are usually devastating in their destruction…It is during these declines that there is virtually no place to hide except cash. The illusions held throughout waves A and B tend to evaporate and fear takes over…1930-32 was a C wave.”

Humorist Dave Barry once wrote, “The excitement about stocks is that at any moment you could be wiped out by economic forces you do not even dimly comprehend.” The phenomenon Barry was talking about is social mood, which is patterned, and is now turning down with a will. Millions of investors are totally clueless, but the data show they are beginning to get edgy.

It was not supposed to happen, but Facebook did a faceplant. The most ballyhood IPO in decades closed the first day barely above the offering price and fell off 25% over the next few days, reflecting a steep dropoff in speculative enthusiasm among investors. But, while there is less buying in the market, the majority of Americans still hold stocks. A Gallup survey finds that 53% of U.S. households were still in the market as of April. The figure is down from 65% in 2007, but still way up from the low of 23% in 1974. At the next bottom, the figure should be much lower than that.

The past few months will be seen, in retrospect, as the last great opportunity to unload investments. The countertrend rally in the markets and the improvement in business offered a temporary respite from the reality of this bear market. It is not a time to be complacent.

There will, indeed, be no place to hide except cash.



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.

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