Prechter: “We Are On Schedule for a Very, Very Long Bear Market”

Prechter on yahoo finance today:

The global selloff in stocks accelerated Thursday, sending the Dow down 3.6% to 10,068 while the S&P 500 lost 3.9% to 1,071.59 and the Nasdaq shed 4.1% to 2,204.

All major U.S. averages are now down for the year and at least 10% below their 2010 highs, meaning the downturn has officially entered “correction” territory.

Unfortunately (for bulls), there’s much more selling ahead, according to Robert Prechter, president of Elliott Wave International and author of Conquer the Crash.

“We should be in for [another] week or two of pretty serious selling,” Prechter says. “They’ll be bounces along the way…but I think this should last a long time. We should be on schedule for a very, very long bear market period.”

In the near-term, the veteran market watcher predicts a “dramatic increase in volatility,” beyond what’s already occurred. The CBOE Volatility Index (VIX) rose another 30% today and is now up about 180% from its late April lows.

Notably, today’s selling occurred despite a rally in the euro amid reports of central bank intervention. Joe Brusuelas of Brusuelas Analytics says, “The capitulation in today’s market has more to do with the unwinding of the easy money [carry] trade on commodities,” which fell again today, with notable weakness in energy and palladium.

Meanwhile, Treasury prices continued to benefit from the “risk aversion” trade with the yield on the benchmark 10-year note falling to 3.21%.

Broken Record or Market Sage?

Other than to say “a long way down,” Prechter wouldn’t say how much further he thinks the market will fall, suggesting a repeat of the 1930-32 scenario when “extremely sharp rallies” kept investors interested and “feeling like a bottom [was] forming.”

Anyone familiar with Prechter knows he’s been predicting doom for a long time so it’s tempting to dismiss his latest warning — a veritable repeat of what he said here in February. But he’s not a perma-bear and did turn bullish ahead of the bottom in March 2009.

More dramatically, in 1978 he co-authored Elliott Wave Principle – Key To Market Behavior, which predicted a great bull market similar to the 1942-1966 rally. By his own admission, Prechter underestimated the extent of that historic rally, which ran from 1982-2000 and saw the Dow rise 1,500% from 777 to 11,723.

Prechter says the market has spent the past 10 years building a “major head and shoulders” top from those 2000 highs, even though they were exceeded in 2007. Ultimately, he expects a “corrective mode that’s going to retrace virtually the entire” 1982-2000 bull market.

“The best place for most people to be is in cash” and equivalents, he says. “You want maximum liquidity until this thing blows over.”

A long term outlook I posted a while back:

I have often compared the current situation in the US to Japan in the 90s. Indeed, a lot of the characteristics of the current contraction match what went on in Japan back then.

Since 1989, the Nikkei index has dropped from just below 40000 to now around 9000. It is conceivable that US stocks will see similar declines over the next decades, along with spectacular counter trend rallies from time to time.

Below I put together a chart that shows how the Nikkei has fared since the bust of the Japanese credit bubble in 89 vs. the development of equities in the US (S&P 500) since the bust of the US credit bubble in 2007:


As you can see, since the crash, both charts have behaved rather similar. Immediately after the crash, the Nikkei, too, staged a phenomenal 35% rally from around 20000 to around 27000. If US equities continue mimic the events two decades ago in Japan, it is indeed conceivable that we may see an S&P 500 in the 200s or 300s in ten years or so.

Obviously that bear rally went on for a lot longer than I expected in my chart above. But such differences won’t matter in the long run. What is important to grasp is that the days of long term rising stocks with the occasional and severe dips are over. We are now on the other side of the peak: A long term declining stock market, with the occasional and severe rallies in-between from time to time.

What I appreciate a lot about Prechter is his unusually long term look back and outlook on the market, and his in depth incorporation of social moods and their swings when it comes to understanding economic phenomena.

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2 thoughts on “Prechter: “We Are On Schedule for a Very, Very Long Bear Market””

  1. I’m sorry but the whole Nikkei vs. S&P comparison deal seems silly to me. Why should that be taken as anything but completely random guesswork?

    I mean it is one thing to make a broad prediction on a variety of factors about the direction of the economy, it is another to look at the chaotic zig-zag of a portion of the market and extrapolate it over the next 10 years.

    I know you have other reasons for your economic forecasts… but this is just silly. If I cared to I am sure I could produce 100 different market comparisons (some of them shockingly similar I am sure :) leading to 1000 different predictions of the market’s future.

    Am I wrong?

  2. Yes, there may very well be better forecasts on the US market, and more valid predictions. I’d be delighted to hear yours. I did not look at any “chaotic zig zag of a portion of the market” though. I begin with fundamentals. I have said time and again that the deflation that the US is in now is very much comparable with that which Japan has been in since the late 80s … only that private debt is even higher here than in was in Japan. The government is taking the same actions to respond to the crisis … only with a lot more spending. US Government Bond yields are testing all time lows and will probably stay low … just as they did in Japan. The dollar is strengthening … just as the Yen did during the Japanese deflation as far as I know.

    Is it likely that these factors will produce the same ailment that Japan has been suffering from? Yes it is. Is it conceivable that in 15 years US equity markets will have developed similarly, given the striking similarities in pretty much all other aspects of economic reality? I think so …

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