Our Elliott wave analysis strongly suggests that the markets and economy are at rare historical junctures.
Robert Prechter begins the January Elliott Wave Theorist by saying, "Century-long trends are rolling over."
He was recently interviewed by Kate Welling of welling@weeden, a journal of independent research, analysis and opinion.
Below is an edited excerpt of that interview.
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Welling: Where behavioral finance theorists look at individuals' psychological quirks, you look at the herd or at trends in the social climate, to illuminate seemingly irrational market action?
Prechter: Right. Behavioral finance is very important, in my estimation, because it has chipped away very significantly at the armor of the Efficient Market Hypothesis. Even Random Walk models must now allow for some non-rational actions. And I see unconscious motivation as patterned, rather than being completely random, which wouldn't make much sense from an evolutionary point of view. But behavioral finance mostly describes a few deviations from rationality. I don't think behavioral finance theorists are anywhere near my view, which is that trend changes in aggregate financial pricing are almost entirely due to changes in unconscious social mood. As you pointed out, emotional reactions to news do occur in the markets. But they are very short-lived. They last a few minutes, maybe a few hours, and that's about it. They don't interrupt a larger trend or larger patterns. My theory - which I call socionomics - differentiates between unconscious social mood and conscious emotional reactions, which have a negligible influence on pricing.
Welling: And social mood changes just keep rolling in the form of Elliott Waves?
Prechter: Well, yes. The smaller waves are components of the larger ones. When A.J. Frost and I wrote our book way back in 1978, we said 'Look, there's a big bull market coming, and it's going to be like the 1920s, because it's the fifth wave under the model. But when it's over, it should be fully retraced, because it's the fifth and final wave of a very large degree.'
Welling: It's amazing how long [the bulls] have been able to forestall what you say is inevitable.
Prechter: Oh, yes, absolutely. But the bulls probably have been equally surprised that the markets haven't gone up over all of this time; have been stuck in neutral. Except in real terms, of course: On that basis, we've been in a very clear bear market since 1999. If you normalize the Dow, divide it by the PPI, stock values have been pretty persistently in a downtrend. If you use real money, the S&P in gold terms is down 87% since 1999. The destruction has been just massive. In fact, do you know where the Dow Jones Industrial Average would be right now, as reported in the Wall Street Journal, if we had stayed on the gold standard, instead of going off it in 1933?
Welling: Not a clue.
Prechter: Well, had the dollar stayed defined as a specific amount of gold - the Dow would be trading at 160. In other words, at the same level today as it was in 1926. It has really made no net progress since 1926.
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