🔸August 18, 1983
Last updated
Last updated
When A.J. Frost and I wrote Elliott Wave Principle in 1978, the prevailing attitude was that the Kondratieff cycle was rolling over and would create the “Awful ’80s.” Books such as How To Survive the Coming Depression and The Crash of ’79 were on the bestseller lists. Gold and inflation were skyrocketing, and Jimmy Carter was battling the memory of Herbert Hoover for a place in history as the country’s worst president.
In writing a book about how to apply Elliott’s Wave Principle, it was virtually impossible to avoid making a forecast, since a wave interpretation of the past almost always implies something about the future. At that time, the evidence was overwhelming that the stock market was at the dawn of a tremendous bull market. Even at that stage, the Wave Principle revealed some of the details of what the bull might look like: a classic five-wave form in the price pattern, a 400% increase in the Dow Industrials in a short span of five to eight years, and a Dow target close to 3000. While that figure was met with some derision at the time and a good deal of scepticism even today, Elliott wave-based forecasts (even competent ones) can often appear extreme. The reason is that the Wave Principle is one of the few tools which can help an analyst anticipate changes in trends, including trends that are so long term that they have become accepted as the normal state of affairs. I have no doubt that by the time this bull market is ending, our call for a huge crash and depression will be laughed off the street. In fact, that’s exactly what we should expect if there is to be any chance that we’re right.
If our ongoing analysis is correct, the current environment is providing a once-in-a-generation money making opportunity. This opportunity takes on greater importance, however, because it may well precede not merely a Kondratieff cycle downswing, but the biggest financial catastrophe since the founding of the Republic. In other words, we had better make our fortunes now just in case “Elliott” is right about the aftermath. But for this article, let’s forget the “crash” part of our forecast and concentrate on the “bull market” part. There are still plenty of questions to be answered about the expected bull market years. After all, no forecast is proven correct until it’s fulfilled, and the Dow is still a long way from our recently refined target of 3600-3700 in 1987. Do we have any evidence that stocks have started what we call “Wave V” in the long advance from the Depression depths of 1932? The answer, in a word, is an emphatic “yes.” Let’s examine several powerfully confirming signs.
The wave structure coming off the August 1982 bottom has been strikingly clear in contrast to the corrective wave ramble which preceded it. Advancing waves are all “fives,” while declines all take the form of one of Elliott’s corrective patterns. The move channels well contains no “overlaps,” and follows all the rules and guidelines that R.N. Elliott spelt out over 40 years ago. Volume and internal momentum figures confirm the preferred wave count at every point along the way. Wave counting adjustments have been minimal in contrast to the frequent uncertainties during corrective periods. All of these elements strongly support the case that a bull market is in progress. Detailed evidence is continually presented in ongoing issues of The Elliott Wave Theorist, so there is no reason to recount it all here. What is particularly interesting at this stage is the corroboration provided by standard technical analysis, the social environment and the recently constructed machinery for financial speculation, all of which have signalled a major change in the status of the market.
Indicators of stock market momentum almost always “announce” the beginning of a huge bull market. They do so by creating a tremendously overbought condition in the initial stage of advance. While this tendency is noticeable at all degrees of trend, the Annual Rate of Change for the S&P 500 is particularly useful in judging the strength of “kickoff” momentum in large waves of Cycle and Supercycle degree. This indicator is created by plotting the percentage difference between the average daily close for the S&P 500 in the current month and its reading for the same month a year earlier. The peak momentum reading is typically registered about one year after the start of the move, due to the construction of the indicator. What’s important is the level the indicator reaches. As you can see [in Figure A-13], the level of “overbought” at the end of July 1983, approximately one year after the start of the current bull market, is the highest since May 1943, approximately one year after the start of Cycle wave III. The fact that they each hit the 50% level is a strong confirmation that they mark the beginning of waves of equivalent degrees. In other words, August 1982 marked the start of something more than what has come to be regarded as the norm, a 2-year bull market followed by a 2-year bear. On the other hand, it has not indicated the start of a glorious “new era” either. If a wave of Supercycle degree were beginning, we would expect to see the kind of overbought reading generated in 1933, when the indicator hit 124% one year after the start of wave (V) from 1932. There is now no chance that such a level can even be approached. Thus, the highest overbought condition in forty years signals to me that our Elliott wave forecast for the launching of wave V is right on target.
Figure A-13
Foreknowledge of how indicators might be expected to act is another example of just useful an Elliott wave perspective can be. As I have argued since the early days of the current advance, the sentiment indicators should reach much more extreme levels than they ever saw in the 1970s. This assessment has been proved by now, with the Dow over 300 points higher than when the sentiment figures first gave sell signals based on the old parameters. Sentiment figures are a function of the vitality and extent of the market in progress. The fact that the indicators’ 10-year parameters have been exceeded is more good evidence that Cycle wave V has begun.
By the top, the nostalgic conservatism of the current social scene should give way to a wild abandon characteristic of the late 1920s and late 1960s. [For the rest of this text, see page 41 of Pioneering Studies in Socionomics — Ed.]
With sentiment, momentum, wave characteristics and social phenomena all supporting our original forecast, can we say that the environment on Wall Street is conducive to developing a fullblown speculative mania? In 1978, an Elliott analyst had no way of knowing just what the mechanisms for a wild speculation would be. “Where’s the 10% margin which made the 1920s possible?” was a common rebuttal. Well, to be honest, we didn’t know. But now look! The entire structure is being built as if it were planned.
Options on hundreds of stocks (and now stock indexes) allow the speculator to deal in thousands of shares of stock for a fraction of their values. Futures contracts on stock indexes, which promise to deliver nothing, have been created for the most part as speculative vehicles with huge leverage. Options on futures carry the possibilities one step further. And it’s not stopping there. Major financial newspapers are calling for the end of any margin requirements on stocks whatsoever. “Lookback” options are making a debut. S&L’s are leaping into the stock brokerage business, sending flyers to little old ladies. And New York City banks are already constructing kiosks for quote machines so that depositors can stop off at lunch and punch out their favorite stocks. Options exchanges are creating new and speculative instruments — guess the C.P.I. and win a bundle! In other words, the financial arena is becoming the place to be. And, as if by magic, the media are geometrically increasing coverage of financial news. New financial newsletters and magazines are being created every few months. Financial News Network is now broadcasting 12 hours a day, bringing up-to-the-minute quotations on stocks and commodities via satellite and cable into millions of homes.
Remember, this is just the set-up phase. The average guy probably won’t be joining the party until the Dow clears 2000. The market’s atmosphere by then will undoubtedly become outand- out euphoric. Then you can start watching the public’s activity as if it were one huge sentiment indicator. When the stock market makes the news reports every single day (as gold did starting about two months before the top, remember?), when your neighbors find out you’re “in the Business” and start telling you about their latest speculations, when stories of stock market riches hit the pages of the general newspapers, when the best seller list includes “How to Make Millions in Stocks,” when Walden’s and Dalton start stocking Elliott Wave Principle, when almost no one is willing to discuss financial calamity or nuclear war, when mini-skirts return and men dress with flash and flair, and when your friends stay home from work to monitor Quotron machines (since it’s more lucrative than working), then you know we’ll be close. At the peak of the fifth wave, the spectacle could rival Tulipomania and the South Sea Bubble.
Part of the character of a fifth wave of any degree is the occurrence of psychological denial on a mass scale. In other words, the fundamental problems are obvious and threatening to anyone who coldly analyzes the situation, but the average person chooses to explain them away, ignore them, or even deny their existence. This fifth wave should be no exception, and will be built more on unfounded hopes than on soundly improving fundamentals such as the U.S. experienced in the 1950s and early ’60s. And since this fifth wave, wave V, is a fifth within a larger fifth, wave (V) from 1789, the phenomenon should be magnified by the time the peak is reached. By that time, we should be hearing that the global debt pyramid is “no longer a problem,” that the market and the economy have “learned to live with high interest rates” and that computers have ushered in a “new era of unparalleled prosperity.” Don’t lose your perspective when the time comes. It will take great courage to make money during this bull market, because in the early stages it will be easy to be too cautious. However, it will take even greater courage to get out near the top, because that’s when the world will call you a damn fool for selling.
One way to avoid the premature selling that is so typical during bull markets is to obtain a long-term perspective on the present which most investors lack. One of the reasons that the Wave Principle is so valuable is that it usually forces the analyst to look at the big picture in order to make all relevant conclusions about the market’s current position. Put/call ratios and 10-day averages are valuable as far as they go, but they are best interpreted within the context of the broad sweep of the market events.
Take another look at the long term Dow chart and ask yourself a few questions about some points that are considered common knowledge.
— Is the market really “more volatile” today than it has ever been in the past? No. A look at 1921-1946 throws that idea right out the window.
— Is the 1000 level a “high” level? For that matter, is 1200 a “high” level? Not any more! The long period spent going sideways since 1966 has put the Dow back at the lower end of its fifty-year uptrend channel in “current dollar” terms (and down to a point of very low valuation in “constant dollar” terms).
— Is the current bull market an “old” bull market which began in 1974 and is therefore “running out of time”? Hardly. Both in “constant dollar” terms and with reference to the 40- year uptrend, the Dow was more undervalued in 1982 than at the crash low in 1974.
— Is my Elliott-based expectation of a 400% gain in 5-8 years a wild one? It appears to be, when compared to recent history. But not when compared to 1921-1929, a 500% gain in 8 years, or 1932-1937, a 400% gain in 5 years.
— Can you always extrapolate current trends into the future? Definitely not. The one rule of the market is change.
— Is any cycle ever “just like the last one”? Not too often! In fact, Elliott formulated a rule about it, called the Rule of Alternation. Broadly interpreted, it instructs the investor to look for a different style of patterns as each new phase begins.
— Is recent market action “too strong,” “overextended,” “unprecedented,” or even a “new era”? No, variations on today’s theme all happened before.
— Is the market a random walk, or an erratic wild ride, whipping back and forth without form, trend or pattern? If so, it’s “wandered” into long-lasting periods of a clear trend, rhythmic cyclical repetition and impeccable Elliott wave patterns.
At the very least, [Figure A-13] helps you picture the market’s action within the broad sweep of history, thus making next week’s money supply report appear as irrelevant as it really is. Furthermore, it helps you visualize why a bull market which is larger than the 30%-80% gains of the upward swings of the last sixteen years is probable while illustrating the potential for a bull market bigger than any in the fifty years.
Although it is probably the best forecasting tool in existence, the Wave Principle is not primarily a forecasting tool; it is a detailed description of how markets behave. So far, the market is behaving in such a way as to reinforce our original Wave V forecast. As long as the market fulfils expectations, we can assume we’re still on track. But ultimately, the market is the message, and a change in behaviour can dictate a change in outlook. One reason that forecasts are useful is that they provide a good backdrop against which to measure current market action. But no matter what your convictions are, it pays never to take your eye off what’s happening in the wave structure in real-time.
