TheStock Market with Elliott Wave Labels from 1693 to Present Day Revealsa Bear Market Formation Since 2000
Guest PostBy Elliott Wave International
The following article was adaptedfrom Robert Prechter's June 2014 issue of TheElliott 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 from1693 to the present. The circled Roman numerals denote waves of GrandSupercycle degree, the largest complete waves for which stock marketdata exist.
Wave I (circled) ended in 1720 at the peakof the South Sea Bubble in England. Wave II (circled) took the form ofa zigzag, labeled (a)-(b)-(c); it ended in 1784. Thirdwaves areusually extended, meaning they are longer than wave one andhave clearsubdivisions. This is exactly how wave III (circled) developed. Itended in 2000.
Wave III (circled) subdivides into fivewaves. 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, asillustrated in Figure 2. Wave I ended in 1937, wave II in 1942, waveIII in 1966, wave IV in 1974 or 1982, and wave V in 2000.
The guideline of alternation indicates ahigh 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 ourworking hypothesis is that wave IV will be a triangle.
"B" waves within flats and trianglesoftencarry beyond the end of the preceding impulsewave. For instance, theS&P Composite index made new highs in 1968 and 1973, but bothof 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 itstermination in the year 2000.
1) As established in my book BeautifulPictures, the low of wave four often occurs at a time thatsubdivides the duration of an entire impulse wave into a Fibonaccisection. As shown in Figure 2, waves I through IV lasted 42 years, andwave V at the peak in 2000 lasted 26 years, producing a Fibonacci timeratio of 21/13. Those two durations in turn are related to the totalduration of wave (V) by the Fibonacciratios 21/34 and 13/34.
2) Wave V is best labeled as a completedfive waves from 1974 to 2000, as shown in Figure 3. It adheres to anormal channel and peaks at the upper end.Labeling the high in 2000 asthe "orthodox top" of wave V -- i.e. the end of the five-wave patternregardless of ensuing higher highs -- is not just semantics. Elliottwave forms tell you which stock market advances are part of a true bullmarket and which are bear market rallies.
3) In the past, orthodox peaks of Elliottwaves have been registered at extremes in thereal value of stocks, notjust their nominal value. The insets in Figure 3 show that wave b hasnot carried to a new high in real terms. In other words, the Dow todaybuys fewer producer materials, commodities and real money (gold) thanit did in 2000, even though its nominal price is much higher. The Dowpriced 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, theDow would be priced at 266 today, not 17,000. Much of the nominal Dow'sprogress after 1966 -- and all of its netprogress since 2000 -- is due not to an increase in corporate valuesbut to a decrease in value for the Federal Reserve's accountingunit(the "dollar"), both by deliberate central-bank policy and by thepyramiding of credit throughout the financial system, much of which hasbeen made possible by the use of force, aka government policy.
4) The year 2000 was the end of the one-waygood times. That is when the all-time high was recorded in themajoraverages' valuation as measured by annual dividend yield,price to bookvalue, and the corporate bond/stock yield spread. Indicatorssuch asGallup's poll of Economic Confidence peaked then, too, by a widemargin. That year, economists were proclaiming a "New Economy" thatwould never falter. All of these eventssupport the case that wave V,and therefore wave (V), and therefore wave III, ended in 2000.
5) Finally, even the market top of 2007 wasmore important than what's happening now.
The year 2007 came on the heels of theall-time high in real estate values in 2006, a time that marked boththe seemingly realized American Dream of universal home ownership andits turn toward its dissolution. It was a time of major change inAmerican finances.
The year 2014 has none of these attributes.Real estate, commoditiesand precious metals are in bear markets, andthe economy has stalled. The only thing rising is stocks.
We can therefore make a case that even 2007was the more important market top for the average American. But wecan't credit the year 2014 with anything nearly as grand as what washappening at the tops of 2000 and 2007. This lack of importance fitsthe b-wave label.
A Bear Market Formation Since2000
The rest of this report isavailable only to Robert Prechter's free email subscribers at ElliottWave International. You will see Prechter'sanalysis of an epic stockmarket pattern tracing out right now that hasnever occurred inrecorded stock market history, going back 300 years -- plus itsimminent and dangerous implications for investors.
Read thereport nowto be certain your portfolio is ready. Clickhere.
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