The
Stock Market with Elliott Wave Labels from 1693 to Present Day Reveals
a Bear Market Formation Since 2000
Guest Post By Elliott Wave International
The following article was adapted
from Robert Prechter's June 2014 issue of The
Elliott Wave Theorist,
one of the longest-running investment letters in the business,
continuously published monthly since 1979.
Figure 1 shows the stock market's waves from
1693 to the present. The circled Roman numerals denote waves of Grand
Supercycle degree, the largest complete waves for which stock market
data exist.
Wave I (circled) ended in 1720 at the peak
of the South Sea Bubble in England. Wave II (circled) took the form of
a zigzag, labeled (a)-(b)-(c); it ended in 1784. Third
waves are
usually extended, meaning they are longer than wave one and
have clear
subdivisions. This is exactly how wave III (circled) developed. It
ended in 2000.
Wave III (circled) subdivides into five
waves. Wave (I) ended in 1835, wave (II) in 1859, wave (III) in 1929,
wave (IV) in 1932 and wave (V) in 2000.
Wave (V) subdivides into five waves, as
illustrated in Figure 2. Wave I ended in 1937, wave II in 1942, wave
III in 1966, wave IV in 1974 or 1982, and wave V in 2000.
The guideline of alternation indicates a
high probability that wave IV will be a form other than a zigzag, i.e.
a flat or a triangle. Triangles are more common than flats, so our
working hypothesis is that wave IV will be a triangle.
"B" waves within flats and triangles
often
carry beyond the end of the preceding impulse
wave. For instance, the
S&P Composite index made new highs in 1968 and 1973, but both
of those highs occurred within the triangle of 1966-1974 (wave IV),
which alternated with the zigzag of 1937-1942 (wave II).
It might seem tempting to believe that wave
(V) is still in progress. But there are five reasons to mark its
termination in the year 2000.
1) As established in my book Beautiful
Pictures, the low of wave four often occurs at a time that
subdivides the duration of an entire impulse wave into a Fibonacci
section. As shown in Figure 2, waves I through IV lasted 42 years, and
wave V at the peak in 2000 lasted 26 years, producing a Fibonacci time
ratio of 21/13. Those two durations in turn are related to the total
duration of wave (V) by the Fibonacci
ratios 21/34 and 13/34.
2) Wave V is best labeled as a completed
five waves from 1974 to 2000, as shown in Figure 3. It adheres to a
normal channel and peaks at the upper end.
Labeling the high in 2000 as
the "orthodox top" of wave V -- i.e. the end of the five-wave pattern
regardless of ensuing higher highs -- is not just semantics. Elliott
wave forms tell you which stock market advances are part of a true bull
market and which are bear market rallies.
3) In the past, orthodox peaks of Elliott
waves have been registered at extremes in the
real value of stocks, not
just their nominal value. The insets in Figure 3 show that wave b has
not carried to a new high in real terms. In other words, the Dow today
buys fewer producer materials, commodities and real money (gold) than
it did in 2000, even though its nominal price is much higher. The Dow
priced in real money -- gold -- topped in 1999 and has collapsed 84%
since then, as shown in the bottom inset in Figure 3.
Had the U.S. maintained honest money, the
Dow would be priced at 266 today, not 17,000. Much of the nominal Dow's
progress after 1966 -- and all of its net
progress since 2000 -- is due not to an increase in corporate values
but to a decrease in value for the Federal Reserve's accounting
unit
(the "dollar"), both by deliberate central-bank policy and by the
pyramiding of credit throughout the financial system, much of which has
been made possible by the use of force, aka government policy.
4) The year 2000 was the end of the one-way
good times. That is when the all-time high was recorded in the
major
averages' valuation as measured by annual dividend yield,
price to book
value, and the corporate bond/stock yield spread. Indicators
such as
Gallup's poll of Economic Confidence peaked then, too, by a wide
margin. That year, economists were proclaiming a "New Economy" that
would never falter. All of these events
support the case that wave V,
and therefore wave (V), and therefore wave III, ended in 2000.
5) Finally, even the market top of 2007 was
more important than what's happening now.
The year 2007 came on the heels of the
all-time high in real estate values in 2006, a time that marked both
the seemingly realized American Dream of universal home ownership and
its turn toward its dissolution. It was a time of major change in
American finances.
The year 2014 has none of these attributes.
Real estate, commodities
and precious metals are in bear markets, and
the economy has stalled. The only thing rising is stocks.
We can therefore make a case that even 2007
was the more important market top for the average American. But we
can't credit the year 2014 with anything nearly as grand as what was
happening at the tops of 2000 and 2007. This lack of importance fits
the b-wave label.
A Bear Market Formation Since
2000
The rest of this report is
available only to Robert Prechter's free email subscribers at Elliott
Wave International. You will see Prechter's
analysis of an epic stock
market pattern tracing out right now that has
never occurred in
recorded stock market history, going back 300 years -- plus its
imminent and dangerous implications for investors.
Read the
report now
to be certain your portfolio is ready. Click
here.
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