I don't know much about Elliott Wave, but after reading this, I have one question for you, gem-x? Who's your daddy?
BEST OF ROBERT PRECHTER
December 4, 2001
From late March to late November, the AAII bullish sentiment percentage has nearly doubled and the 10-day S&P Daily Sentiment Index more than quintupled to 81% bulls on November 14. This accumulating optimism is the opposite of the bearishness that a sideways move typically generates in a healthy bull market. It confirms that there is little chance of new highs in any major index.
Another area that is set up perfectly for the next leg down is the sentiment of the professionals. Many are even more bullish than the public. At 76%, Wall Street strategists’ equity allocations have pushed to another record high. This is the "Sell Side" Consensus Indicator we showed back through 1985 in the January issue (see page 6). In the 16 years that Richard Bernstein of Merrill Lynch has been keeping this indicator, it has never even been close to these levels. The highest prior peak was 62% on the approach to the Dow’s January 1994 high. Bernstein notes that subsequent 12-month equity returns have never beaten cash when this figure is above 61%. Barron’s latest Big Money Poll of money managers found that 67% of money managers are bullish or very bullish, "the highest level in years." Like the public, these pros have yet even to seriously entertain the concept of a long bear market. A long-term low will not hold without capitulation from this group. At this point, that appears to be a long way off.
Meanwhile the papers are filling up again with cockamamie reasons to re-commit to stocks. "All it took was a big military conquest to give investors the courage to jump back in," says one story that goes on to conclude: "You’ve got to be in equities." "For Investors, It’s a Season of Hope," explains another. Many articles continue to reflect a stunning lack of respect for the risk of equity investment. An investment columnist who told investors to stick "most emergency money in stocks" during the mania now says he may have been a bit arrogant. He has revised his strategy to account for the fact that stocks do go down. The answer is to keep emergency money "in stocks and be prepared to borrow." He simply figures that by mortgaging the house or putting that trip to the emergency room on their credit card, investors can generate wealth and stay solvent at the same time. Unless, of course, stocks do the unthinkable and fall further, in which case, the emergency will be transformed into a much deeper tragedy. This is precisely what the second wave of a bear market is designed to do: make the worst of a bad situation.
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THE ECONOMY and DEFLATION
It’s official. It’s a recession. The National Bureau of Economic Research, the official recession sanctioning body, says it started in March. Suddenly, everybody knows what that means: it was a recession. Or as The Wall Street Journal put it, "The market is taking a contrarian view. The overwhelming thought is that when a recession is officially declared, it must almost be over." One headline captured the sentiment this way: "The Recession is Here. Long Live the Recovery." When it comes to forecasting the economy, contrary opinion can be a helpful tool. In fact, one of the reasons we indicated that a recession was on its way in January 2001 was that no matter how persuasively the data warned that a recession was afoot, "economists refused to predict one." But what’s really happening here is that economists are using the official recognition of a recession to maintain their entrenched bullishness, which remains the consensus. The truly contrary conclusion is that it’s not a recession, it’s a depression, which means the economic contraction is not over; it is just getting started. Loads of the data economists usually pay attention to confirm this outlook. Even housing, the one sector that was "going to keep us out of recession" has turned down. In fact, last summer’s reported boom (see August EWFF) has been revised downward and now shows a slight decline. "Without anyone having really noticed, sales of new and existing homes have inched downward since June," reports The New York Times. This movement in the fact of "steadily falling mortgage rates" is another sign that the downturn is still gathering steam.
Prices are now falling across the U.S. economy. October brought the biggest one-month slide in the history of the Producer Price Index. The CPI also registered its first monthly drop since 1986. In recent weeks, new car prices have effectively fallen 4.7%, while used car prices are in a free fall. One revealing decline belongs to the "famed antidepressant" Prozac. It is now being given away through a "depressed dot-com." In a bid to forestall the loss of 80% of its market share, Eli Lilly is offering free one-month supplies through WebMD. Nordstrom department stores have reduced clothes and shoes as much as 60%. Crude materials prices have fallen for six consecutive months, and, in October, dropped 9.1%. Since the government began keeping such statistics in 1947, the only bigger decline was in February 2001.
The following clip is from a story on the "Glut of Bargains" in the November 25 New York Times:
"America is now on sale. Airlines and hotels are offering deep discounts. Carmakers are extending interest-free loans. Department stores have already marked many items down sharply. The price of computers continues to plummet. Commercial rents are falling for the first time in a decade."
The more these articles zero in on the "rising specter of deflation," the more the experts ultimately reject the potential for an extended period of falling prices. After describing the "lingering glut" and running through a lengthening list of price cuts, the Times article excerpted above concludes, "Deflation is unlikely, analysts say." To paraphrase what EWFF said about a recession in January, no matter how close we get to deflation, economists refuse to predict it. Even as a few in the media declare, "deflation is upon us," no major articles have suggested that it will persist. This reluctance to commit to the plain fact of deflation is a perfect set-up for the next wave of falling prices. It is further proof that a depression and not just a recession is underway because it means that many will have to place their bets on deflation later when the spiral is further along. As more people get out of debt, sell property and financial assets and take other steps to protect themselves, they will feed the force of the decline.
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