New Year, New High Hopes for Stocks

January 11, 2012

By Elliott Wave International

You can probably relate: Every year, come January 1, I just can't help but feel that "every little thing is gonna be all right," as Bob Marley sang.
This year, the mainstream financial community is sharing the same sentiment. Here's how EWI's Steve Hochberg summarized it [emphasis added]:

At its conclusion, 2011 was marked by back-and-forth stock swings that resulted in essentially a flat market. My Bloomberg screen shows that the DJIA ended up 5.53% for the year, the S&P was flat...while the NASDAQ was down 1.80%. The broadest aggregate measure of stock market performance, the DJ Wilshire 5000, which includes nearly all stocks that trade, ended 2011 down 1%.
The Dow's action masks a strongly negative stock market performance overseas. For instance, in U.S. dollar terms, the Euro Stoxx 50 Index was down nearly 20% in 2011, with the FTSE down almost 6%, the French CAC off almost 20% and the German DAX down over 17%. Asian markets were also hit hard. The S&P Asia 50 lost over 15%, the Nikkei declined 13%, the Hang Seng was off 20%, the Shanghai Composite ended 2011 down over 18%, while Australia was lower by 14%. All were down in euro terms, too.
But not to worry: a recent USA Today article notes that a "quick survey of New Year's prognostications from investment strategists suggests stocks might deliver the double-digit gains that they have put up, on average, over the long term. A snapshot of 2012 year-end-price targets from five firms shows an average gain of 10.5% for stocks."

Very optimistic, indeed!
Except, when have we heard that kind of talk before?
Hochberg continues:

The "10.5%" forecasted gains for the coming year is interesting because it is almost exactly the average forecasted gains for stocks for 2011, as the subheading in the following Barron's cover story from December 2010 shows.

That's right. A year ago, forecasts for stocks in 2011 were just as optimistic as they are now for 2012 -- and largely for the same reasons: improving economy, recovering real estate and jobs markets, and a host of other "better fundamentals."
From an Elliott wave perspective, the reason 2011 mainstream financial forecasts fell flat was simple: Stocks don't follow the economy. It's the other way around: The economy follows stocks.
What's Really Ahead for 2012? There is a lot of optimism building around the stock market, but is it based on sound analysis or hope created by recent economic news reports? Elliott Wave International has released a free report to help you navigate the markets and prepare for what's ahead. You'll get hard facts, 25 eye-opening charts and 14 pages of straightforward commentary that will help you see the "big picture" so you can position yourself for the years to come.
Download The Most Important Investment Report You'll Read for 2012 now.

Why you should Choose the Wave Principle

Why Choose the Wave Principle?
Robert Prechter reveals why he embraced the Wave Principle.
January 4, 2012

By Elliott Wave International

Robert Prechter is the widely recognized authority on the Elliott Wave Principle.
Read how he learned about the Wave Principle and why he embraced it in the edited excerpt from his book Prechter's Perspective below (Q&A format):

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Question: What was it about Elliott that captured your attention?
Robert Prechter: I had seen some mentions of the Wave Principle in a few market newsletters and a couple of obscure books, and I decided that either this was someone's elaborate fantasy or it was an amazing discovery. I wanted to reject it from what evidence I could find or include it as part of my growing arsenal of technical analytical methods.
Q: How long did it take you to develop your "eye" for discerning these waves?
RP: About 30 minutes -- when I plotted my first hourly chart covering a few months. Apparently, there is such a thing as an eye for patterns. One person told me he had trouble finding the fives and threes. The key is to keep a chart. Most people have no trouble seeing the Principle at work. Q: You accepted it just like that?
RP: When you begin to see the five-wave impulses and the three-wave corrections unfold over and over, it does not take long for you to say either "I see, but I refuse to believe it," or "This is obviously what's happening; let's see how far it continues." It took about a year and a half of applying it until I knew that Elliott was absolutely right. I'm pretty hard-headed, and it takes substantial reason for me to accept a new idea. By that time, I decided I had seen what amounted to proof. I then said to myself, "This is unbelievable. How come no one is commenting on this? The market is pulling back to points he said it should pull back to in the patterns. It is rising up to levels he said it should, in ways he said it should."
Q: What was it that convinced you?
RP: The Wave Principle proves itself when you merely keep a chart. Once I did that, I recognized what was going on rather quickly. The wave patterns are repetitive and at times, over protracted periods, they are easily discernible.

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The basic Elliott wave pattern consists of impulsive waves (denoted by numbers) and corrective waves (denoted by letters). An impulsive wave is composed of five subwaves and moves in the same direction as the trend of the next larger size. A corrective wave consists of three subwaves and moves against the trend of the next larger size.
As the chart below shows, these basic patterns link to form five- and three-wave structures of increasingly larger size.

The Elliott Wave Principle helps to identify turning points in the trends of financial markets.
It does not provide certainty, yet the Wave Principle does provide a way to assess the probabilities of possible future paths of a given financial market.

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Learn more in the free Elliott Wave Basic Tutorial The Elliott Wave Basic Tutorial is a 10-lesson comprehensive online course with the same content you'd receive in a formal training class -- but you can learn at your own pace and review the material as many times as you like! Get 10 FREE Lessons on The Elliott Wave Principle that Will Change the Way You Invest Forever