Winds of Change

To understand the liberating effect of asceticism,
consider that losing all of your fortune
is much less painful than losing only half of it.

– N.N. Taleb

The experience of the Grand Supercycle stock market top in the Spring of 2000 was varied: individual investors, gazing at their monthly portfolio statements, waxed expansive and planned early retirement in Portofino. Institutional money managers bought strings of polo ponies and homes in the Hamptons. Conventional market analysts wrote best selling books (Dow 100,000 by Next year!).

Elliott Wave analysts/socionomists liquidated all investments and went to cash.

The ensuing crash in the  market surprised the crowd, who expected it to continue rising. Elliottitians were surprised, too, because the bear market got started, only to be aborted in 2003 when a massive influx of Fed-induced liquidity ignited commodity and real estate bubbles, causing the stock market to climb back in sympathy before a true first leg down (A wave) had completed. They were reminded that a bear market is a correction of the primary uptrend, and corrections can be serendipitous, drawn out affairs.

The second series of bubbles peaked in 2007 and the selloff into March, 2009 generated the momentum and enough fear to be labeled an A wave.

Ralph Elliott observed that  the corruption and behavioral excesses evolving in society during a prolonged bull market  are eventually excised with a bear market. He called it Nature’s Way, a process that plays out in three waves (A,B,C): The A wave down, causes significant damage. The rot in the system is exposed, but there is little liquidation because the crowd retains its bullishness. There follows a counter-trend, B wave rally which is psychologically transitional–the bullish sentiment burns with intensity, but the market is narrower, and the economy, still burdened with debt and corruption, responds tepidly. It is during this rally that the clamor for change grows and the “fat cat police” begin to flex their muscles to bring Wall Street to account while institutional investors bear down on the boards of directors of major corporations.

The final C wave decline brings about enough pain to force the cleanup. Unfortunately, C waves are take-no-prisoner affairs and economic suffering and devastation engulf the whole of society. Analysts at Elliott Wave International have expected the B wave to yield to the C wave for some time. Again, they’ve been reminded that corrections are irregular, and it is up to social mood to turn down in earnest to bring the bear market to an end.

Robert Prechter, the researcher who developed socionomics, the hypothesis that social mood is the driver of the stock market and all social activity, observed that, because social mood is transitioning from positive to negative, politics during the B wave become polarized (The Wave Principle of Human Social Behavior and the New Science of Socionomics). Today’s hyper-polarized politics, together with the abysmal performance of the economy and a steady decline in the expectations for improvement by the polls provide strong evidence that, indeed, the market is in a B wave, not a new bull market.

Here is how the market looks today:

S&P 500
Ironically (and predictably), conventional analysts are extremely bullish today. Even long-term, bearish hold-out strategists have jumped on the bandwagon this year. One of them recently declared (after four years of rise) that the market was “entering the next secular bull market.” The late arrival of conventional analysts is more evidence of a major turn down coming soon.

Meanwhile, the Elliott Wave outlook for the dollar is for a strong advance over the next couple of years (see earlier post below). So, why be anywhere else?



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

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