1985: Turn Back Time

04/18/2003 12:00 am EST


Robert Prechter

Founder and President, Elliott Wave International

'Even though the market is close to its all-time high, I am recommending using cash to add to stock positions. The market's technical position is now the best since August 1982. Blue chip oriented mutual funds are the best way for the average investor to participate.'

Now we are looking at the same type of waves, but in this situation the waves suggest a bear market. It's the same progression, but on the downside. To make the analogy even clearer, look at the data for the recent market and turn it upside down, and compare it to September 1985. It is the same, and if we get the same outcome, the market will be set to soar- on the downside. Back in 1985, we were the only newsletter followed by Market Vane's sentiment report that was bullish and long. Today, we are the only one under their coverage that are outright, aggressive bears. The vast majority of pundits today are very bullish, of course, and the few bears that have emerged late last year are either reformed or temporarily bullish. Just last week, we received an e-mail from a reporter at Barron's who told us, 'Just about everybody but you folks is pie-eyed bullish.' I believe April 7, 2003 (the date of this e-mail) will go down in history as having been a bad time to be pie-eyed bullish, just as late September 1985 was a bad time to have been high-conviction bearish, which is as it must be for markets to trend and reverse as they do. A selective appraisal of market momentum was a trap in September 1985, and I think it is a trap now. This week, the Dow and S&P even briefly jumped above their 2002 downtrend lines. The setup is remarkably similar to 1985. It is once again bound to prove to be a false breakout, the precise moment when the vast majority possesses its maximum bullish conviction that a major trend reversal has occurred.

"Regardless of the current market's price action, the top is occurring now and this topping process reflects market psychology. The averages are scrapping multi-year lows, yet investors, advisors, and money managers are bullish as demonstrated by valuation and sentiment. Calling the price high in March 2002 and the top in December 2002 worked just fine, as it's highly unlikely that we will ever get back to either level. The only transition remaining to occur in the cycle's topping process is a move away from optimism toward accelerating pessimism. The incredibly bearish fact is that since early 2002 the continued advance of this cycle has been unable to generate a net price rise. This time should prove to be the orgasmic conclusion of a desperate stock market optimism. Call any of your friends and warn them to get out of their stocks (and real estate, commodities, businesses, etc.) with some semblance of dignity. When the next cycle turns down, the market will let go of its hopes and the massive herd of formerly devout bulls will be selling like madmen for many months. We have steadfastly used every rally peak since the first quarter or 2000 to reinforce our bearish long-term outlook and to recommend that traders add to short positions. This approach has been very profitable already, but the biggest rewards lie for bears ahead."

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