Armageddon for Stocks Nigh, Says Guru Prechter
Robert Prechter, perhaps the best-known stock market guru of the 1980s, is visiting the Oracle at Delphi in Greece this month. It’s a family vacation, he told his newsletter subscribers in their May 28 issue. But it’s also “the only way I would be able to resist the self-destructive urge to go on national TV and announce the end of the bull market,” he added.
If you remember the 1982-87 bull market, you may remember Prechter. As editor of the Elliott Wave Theorist newsletter, he became legendary for accurately predicting stocks’ stunning rise through that period--and then for declaring that a selloff was near, just before the Oct. 19, 1987, crash.
What sticks in the minds of many Prechter followers, however, is the magic number 3,600: That was supposed to be the Dow Jones industrial average peak in 1987 or 1988, he had confidently predicted before the crash unfolded. In fact, the Dow never got close, topping out at 2,722 in August, 1987. Even though Prechter turned bearish pre-crash, many investors probably never forgave him for making 3,600 such an icon. Belief in that number had sucked in many new stock buyers in ’87.
Now here is Wall Street, 5 1/2 years later, with the Dow at 3,491. And Prechter, unbowed, has returned with his 3,600-or-bust prediction. Or more accurately, 3,600, then bust.
The market will most likely hit 3,600 to 3,700 on the Dow sometime this summer, the 44-year-old Prechter says. But soon after that, a bear market of monumental proportions will begin, he says, coincident with a devastating depression.
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How monumental a bear market? Assuming the Dow peak is about 3,600, Prechter’s target is for an ultimate low on the Dow of between 100 and 400. (Yes, you read that right.)
If this sounds familiar, it’s because the current Prechter forecast is not much different from the summer-1987 Prechter forecast. He has come full circle since the October, 1987, crash, when the Dow bottomed at 1,738. In the aftermath, Prechter remained cautious on the market; while he predicted a rebound in 1988, he dropped the idea of a 3,600-Dow as a target.
Not until late 1989 did 3,600 return to Prechter’s lexicon. But even then, Prechter told his long-term-investor subscribers to stay out of stocks and keep their money in short-term “cash” investments. As a result, his followers have earned just 30% on their money since Nov. 1, 1987, missing the 111% rise in stocks since then, says newsletter tracker Hulbert Financial Digest.
David Allman, Prechter’s research director at the newsletter’s Gainesville, Ga., offices, admits that Prechter’s followers have sacrificed potentially large returns by staying out of the market since late 1987. “Our opinion is that we’re (seeing) a major top in the market, but it has taken substantially longer than we thought,” he concedes. Being wrong--or at least early--has cost Prechter: His newsletter subscribers now number 4,500, down from 20,000 at his 1980s peak.
Still, that does not change the outlook, Allman steadfastly maintains. Stocks are poised for a decline so catastrophic, he says, that “we believe the average person should not have a dime of their hard-earned money in the stock market now.”
While some of Wall Street’s bulls might dismiss Prechter as a crackpot, in fact the Elliott Wave Theory isn’t so far-fetched. Simply put, it holds that stock cycles occur like other cycles in nature, in more or less regular patterns--and thus can be predicted. The theory was first put forth by market seer Ralph Elliott in 1939.
Prechter has taken the theory a step further, suggesting that cycles of major social change converge with stock market cycles over time.
The U.S. economy, Prechter preaches, is now in the fifth and final wave of a major up cycle that began with the founding of the republic in 1789. Likewise, the stock market also is in a final up wave that began in July, 1932, he says.
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Linking the economic and market cycles, it’s an understatement to say that Prechter sees hard times ahead. “The global depression is upon us,” Allman says. “People say, ‘Where are the bread lines?’ Our answer is that we’re not at the bottom yet.” Worsening U.S. social problems, the violent fracturing of nations such as Yugoslavia and the rise of extremist movements all warn of the coming global disorder, according to Prechter’s work.
Yet Prechter does not suggest stocking up on shotguns and canned goods, like other doomsayers. Depressions and bear markets--even those that wipe out 90% of stocks’ value--come and go, Allman says. The key is to profit from the cycles, he says. Prechter’s advice to stay in cash (specifically, U.S. Treasury bills) means that his followers will be ready to buy stocks and other deflated assets when the bottom finally is reached later in the decade, Allman says.
You think the wave theorists are absurdly pessimistic? So do most stock pros. But Allman says, “We are, I like to think, just realists.” That, or they’re stopped clocks: Eventually they’ll be right.
