Black Monday: Ancient History Or Imminent Future?

October 29, 2009

By Nico Isaac

The following article includes analysis from Robert Prechter’s Elliott Wave Theorist. For more insights from Robert Prechter, download the 75-page eBook Independent Investor eBook. It’s a compilation of some of the New York Times bestselling author’s writings that challenge conventional financial market assumptions. Visit Elliott Wave International to download the eBook, free.
Once upon a time, the term "Black Monday" was to Wall Street what the name "Lord Voldemort" was to Hogwarts. It turned the air freezing cold and sent traders flinching around every corner in fear of a repeat of the October 19, 1987 or October 28, 1929 meltdown.
Case in point: The 2008 "Black Monday" anniversary. At the time, the U.S. stock market was locked in a ferocious downtrend that included regular, triple-digit daily declines of 400 points and more. Needless to say, when the final two Mondays of October arrived, the least superstitious investors surrounded their portfolios with more good-luck talismans than a Bingo player. See October 19, 2008 AP headline below:

"Black Monday: Stocks Sink As Gloom Seizes Wall Street. Prolonged Economic Turmoil" is seen.

That was then. Today, the usual dread surrounding the back-to-back string of "Black Mondays" is nowhere to be found. In its place, media reports abound of a new, global bull market "shrugging off," "ignoring," and "making a distant memory" of the event.
For one, "gloom" hasn't "seized" the U.S. stock market in quite a while; from its March 2009 low, the Dow has risen more than 50% to above the psychologically important 10,000 level. For another, the mainstream experts insist that today's financial animal is unrecognizable to that of 1987, and especially 1929. In their eyes, it's a completely different -- i.e. safer, smarter, and sounder system.
We beg to differ.
See, while the usual experts want to put as much mental distance between today's market and those that facilitated the 1987 recession and 1929-1932 Great Depression -- the physical similarities are impossible to ignore; more so, in fact, to the latter scenario.
Here, the October 2009 Elliott Wave Financial Forecast presents the following news clip from the October 25, 1929 New York Daily Investment News.

Now, take a look at these headlines from the week of October 12-17, 2009:

"The Great Recession Is Over." (Reuters) --- "80% of Economists Say The Worst Is Behind Us." (CNN Money) --- "The Bull Is Back" (AP) --- "The Economic Recovery Is Well Underway" (Wall Street Journal)

They're interchangeable -- Eighty years later.
Along with a similar extreme in bullish sentiment, the performance of stocks between now and the 1929 situation is cut from the same cloth. After an initial plunge from August 1929 through late October 1929, the US stock market enjoyed a powerful rally well into the following year. NOW: After a steep freefall from its October 2007 peak, the US stock market is once again enjoying the fruits of a powerful rally back to new highs for the year.
Also, on closer examination, the October 19 Elliott Wave Theorist (EWT, for short) uncovers an even deeper parallel between the 2009 rally and the 1929-30 one. Here, EWT presents the following snapshot of the Dow during the Depression-era advance:

As Bob Prechter points out -- in 1930, stocks rallied to the level of the preceding year's gap. Bob then reveals that the same level has been reached now.
So, we all know how the 1930 rally ended. The question is whether the 2009 advance will experience the same fate. As Bob explains in the Theorist, the only way to know for certain is to "look at the reality of the situation."

For more information, download Robert Prechter’s free Independent Investor eBook. The 75-page resource teaches investors to think independently by challenging conventional financial market assumptions.

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Robert Prechter, Chartered Market Technician, is the world’s foremost expert on and proponent of the deflationary scenario. Prechter is the founder and CEO of Elliott Wave International, author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.

Earnings: Is That REALLY What's Driving The DJIA Higher?

The idea of earnings driving the broad stock market is a myth.
October 22, 2009

By Vadim Pokhlebkin

It's corporate earnings season again, and everywhere you turn, analysts talk about the influence of earnings on the broad stock market:

• US Stocks Surge On Data, 3Q Earnings From JPMorgan, Intel (Wall Street Journal)
• Stocks Open Down on J&J Earnings (Washington Post)
• European Stocks Surge; US Earnings Lift Mood (Wall Street Journal)

With so much emphasis on earnings, this may come as a shock: The idea of earnings driving the broad stock market is a myth.
When making a statement like that, you'd better have proof. Robert Prechter, EWI's founder and CEO, presented some of it in his 1999 Wave Principle of Human Social Behavior (excerpt; italics added):

Are stocks driven by corporate earnings? In June 1991, The Wall Street Journal reported on a study by Goldman Sachs’s Barrie Wigmore, who found that “only 35% of stock price growth [in the 1980s] can be attributed to earnings and interest rates.” Wigmore concludes that all the rest is due simply to changing social attitudes toward holding stocks. Says the Journal, “[This] may have just blown a hole through this most cherished of Wall Street convictions.”
What about simply the trend of earnings vs. the stock market? Well, since 1932, corporate profits have been down in 19 years. The Dow rose in 14 of those years. In 1973-74, the Dow fell 46% while earnings rose 47%. 12-month earnings peaked at the bear market low. Earnings do not drive stocks.

And in 2004, EWI's monthly Elliott Wave Financial Forecast added this chart and comment:

Earnings don’t drive stock prices. We’ve said it a thousand times and showed the history that proves the point time and again. But that’s not to say earnings don’t matter. When earnings give investors a rising sense of confidence, they can be a powerful backdrop for a downturn in stock prices. This was certainly true in 2000, as the chart shows. Peak earnings coincided with the stock market’s all-time high and stayed strong right through the third quarter before finally succumbing to the bear market in stock prices. Investors who bought stocks based on strong earnings (and the trend of higher earnings) got killed. 

So if earnings don't drive the stock market's broad trend, what does? The Elliott Wave Principle says that what shapes stock market trends is how investors collectively feel about the future. Investors' mood -- or social mood -- changes before "the fundamentals" reflect that change, which is why trying to predict the markets by following the earnings reports and other "fundamentals" will often leave you puzzled. The chart above makes that clear.
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Robert Prechter, Chartered Market Technician, is the world’s foremost expert on and proponent of the deflationary scenario. Prechter is the founder and CEO of Elliott Wave International, author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.

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My contact over at Robert Prechter's financial analysis firm, Elliott Wave International, just told me about a free "Conquer the Crash Collection" from Prechter's New York Times best-selling book. This valuable resource includes 8 lessons on topics critical to your financial survival, including: what you should do with your pension plan, what you should do if you own a business, calling in loans and paying off debt, whether you should trust the government to protect you -- and much more. Learn more about this exciting resource, and get your free access here.

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Greetings,
In every disaster, only a very few people prepare themselves beforehand. Think about investor enthusiasm in 2005-2007, and you'll realize it's true.
Financial analyst Robert Prechter warns that the doors to financial safety are closing all over the world. He believes prudent people need to act while they still can.
To coincide with the release of the second edition of Prechter's New York Times best-selling book, Conquer the Crash, these 8 free lessons share some of the most valuable, still-prescient knowledge from the original text.
I encourage you to learn more about Prechter's Conquer the Crash. EWI's free "Conquer the Crash Collection" is the perfect place to start.
Learn more, and get immediate access to the 8-lesson "Conquer the Crash Collection" here.
Regards,
 StocksDoc

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About the Publisher, Elliott Wave International
Founded in 1979 by Robert R. Prechter Jr., Elliott Wave International (EWI) is the world's largest market forecasting firm. Its staff of full-time analysts provides 24-hour-a-day market analysis to institutional and private around the world.

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Conquer the Crash

Death of the Dollar, Again: Before You Mourn, See This Chart

October 9, 2009

The following article is based on analysis from Robert Prechter’s Elliott Wave Theorist. For more insights from Robert Prechter, download the 75-page eBook Independent Investor eBook. It’s a compilation of some of the New York Times bestselling author’s writings that challenge conventional financial market assumptions. Visit Elliott Wave International to download the eBook, free.
By Nico Isaac
If you want the latest news on the U.S. Dollar Index, try a search under its new ticker symbol, RIP. -- as in, "rest in peace." Let the record show: In the early morning hours of Tuesday, October 6, the mainstream financial community officially declared "The Demise of the Dollar" (The Independent).
The "coroner's report" cites these details as the causes of death:

• An alleged (and later denied) secret meeting among leaders of certain Arab States, China, Russia, and France which aimed for the immediate discontinuation of oil trading in U.S. dollars.
• And, an open statement from one senior United Nations official that proposed the dollar be replaced as the world's reserve currency.

In the words of a recent Washington Post story: "The growing international chorus wants the dollar replaced... a move that would end the greenback's six-decades of global dominance."
And with that, the line between negative sentiment -- AND -- "EXTREME" negative sentiment was crossed. It occurs when the beliefs about a market lean so far over in one direction, that the boat investors are sitting in is about to tip over... Just like the last time.
Case in point: Spring 2008. The U.S. dollar stood at an all-time record low against the euro after plunging more than 40% in value. And, according to the usual experts, the greenback was "dead"-set to meet its maker. On this, these news items from early 2008 say plenty:

• "The dollar is a terribly flawed currency and its days are numbered." (Wall Street Journal quote)
• "It's basically the end of a 60-year period of continuing credit expansion based on the dollar as the world's reserve currency." (George Soros at the World Economic Forum)
• "Greenback is losing Global Appeal... the 'Almighty' Dollar is Gone." (Associated Press)

YET -- from its March 2008 bottom, the U.S. dollar came back to life with a vengeance, soaring in a one-year long winning streak to multi-year highs. In the most current Elliott Wave Theorist (published September 15, 2009), Bob Prechter presents the following close-up of the Dollar Index since that trend-turning bottom. (some Elliott wave labels have been removed for this publication)

At a measly 6% bulls, the bearish dollar boat tipped over. The situation today is even more remarkable: The percentage of bulls is lower, at 3-4%, while the dollar's value is higher than the March 2008 level.
It's crucial to understand that markets don't necessarily respond to sentiment extremes immediately. But, such extremes do indicate exhaustion of the trend -- which is usually the opposite of what the mainstream expects.

For more information, download Robert Prechter’s free Independent Investor eBook. The 75-page resource teaches investors to think independently by challenging conventional financial market assumptions.

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Robert Prechter, Chartered Market Technician, is the world’s foremost expert on and proponent of the deflationary scenario. Prechter is the founder and CEO of Elliott Wave International, author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.

The Elliott Wave Principle

 The Elliott Wave Principle

In the 1930s, Ralph Nelson Elliott, a corporate accountant by profession, studied price movements in the financial markets and observed that certain patterns repeat themselves. He offered proof of his discovery by making astonishingly accurate stock market forecasts. What appears random and unrelated, Elliott said, will actually trace out a recognizable pattern once you learn what to look for. Elliott called his discovery "The Elliott Wave Principle," and its implications were huge. He had identified the common link that drives the trends in human affairs, from financial markets to fashion, from politics to popular culture.
Robert Prechter, Jr., president of Elliott Wave International, resurrected the Wave Principle from near obscurity in 1976 when he discovered the complete body of R.N. Elliott's work in the New York Library. Robert Prechter, Jr. and A.J. Frost published Elliott Wave Principle in 1978. The book received enthusiastic reviews and became a Wall Street bestseller. In Elliott Wave Principle, Prechter and Frost's forecast called for a roaring bull market in the 1980s, to be followed by a record bear market. Needless to say, knowledge of the Wave Principle among private and professional investors grew dramatically in the 1980s.
When investors and traders first discover the Elliott Wave Principle, there are several reactions:

• Disbelief – that markets are patterned and largely predictable by technical analysis alone
• Joyous “irrational exuberance” – at having found a “crystal ball” to foretell the future
• And finally the correct, and useful response – “Wow, here is a valuable new tool I should learn to use.”

Just like any system or structure found in nature, the closer you look at wave patterns, the more structured complexity you see. It is structured, because nature’s patterns build on themselves, creating similar forms at progressively larger sizes. You can see these fractal patterns in botany, geography, physiology, and the things humans create, like roads, residential subdivisions… and – as recent discoveries have confirmed – in market prices. 
Natural systems, including Elliott wave patterns in market charts, “grow” through time, and their forms are defined by interruptions to that growth.
Here's what is meant by that. When your hands formed in the womb, they first looked like round paddles growing equally in all directions. Then, in the places between your fingers, cells ceased growing or died, and growth was directed to the five digits. This structured progress and regress is essential to all forms of growth. That this “punctuated growth” appears in market data is only natural – as Robert Prechter, Jr., the world's foremost Elliott wave expert and president of Elliott Wave International, says, “Everything that thrives must have setbacks.”
The first step in Elliott wave analysis is identifying patterns in market prices. At their core, wave patterns are simple; there are only two of them: “impulse waves,” and “corrective waves.”
Impulse waves are composed of five sub-waves and move in the same direction as the trend of the next larger size (labeled as 1, 2, 3, 4, 5). Impulse waves are called so because they powerfully impel the market.
A corrective wave follows, composed of three sub-waves, and it moves against the trend of the next larger size (labeled as a, b, c). Corrective waves accomplish only a partial retracement, or "correction," of the progress achieved by any preceding impulse wave.
As the figure to the right shows, one complete Elliott wave consists of eight waves and two phases: five-wave impulse phase, whose sub-waves are denoted by numbers, and the three-wave corrective phase, whose sub-waves are denoted by letters.
What R.N. Elliott set out to describe using the Elliott Wave Principle was how the market actually behaves. There are a number of specific variations on the underlying theme, which Elliott meticulously described and illustrated. He also noted the important fact that each pattern has identifiable requirements as well as tendencies. From these observations, he was able to formulate numerous rules and guidelines for proper wave identification. A thorough knowledge of such details is necessary to understand what the markets can do, and at least as important, what it does not do.
You have only just begun to learn the power and complexity of the Elliott Wave Principle. So, don't let your Elliott wave education end here. Join Elliott Wave International's free Club EWI and access the Basic Tutorial: 10 lessons on The Elliott Wave Principle and learn how to use this valuable tool in your own trading and investing.