Looking for Mr. Super-cycle
Warning of new falls, Hochberg uses 300 years of data
By Thom Calandra, CBS.MarketWatch.com
Last Update: 10:59 AM ET Jan. 8, 2003
SAN FRANCISCO (CBS.MW) -- Scores of companies are brightening the internal coaching, or "guidance," they give investors on their sales and profits.
Yet solitary voices warn of trouble ahead for major stock-market indexes. One of those voices hails from Elliott Wave International, strategist Robert Prechter's research shop that sees utter devastation ahead for stocks.
Steve Hochberg is the guy at Elliott Wave who keeps a minute-by-minute watch on the stock market, which Prechterites regard as being full of bull. Like his boss Prechter, Hochberg expects lower and lower levels for U.S. stock indexes over coming months and years. See: Market's last-gasp rally.
Hochberg, a technical analyst by training and now Prechter's chief market watcher, is a full acolyte of Elliott Wave fractal patterns, which he calls "the best reflection of social mood and our main methodology." Elliott Waves are credited with correctly signaling horrific equity losses -- and steep drops in currencies, commodities and bonds.
Conversely, the waves are blamed for exhibiting trends too early, or too late, or being too frenetic for the practical use of most individuals. Prechter acknowledges his wave signals led him -- and his subscribers -- to the sidelines during the late 1990s bull market in U.S. stocks.
Accountant Ralph Nelson Elliott developed Elliott Wave theory in the 1930s. The fractal premise boils down to this: all events -- psychological, physical and technical -- repeat themselves. In financial markets, market trends occur in five waves. Reversals, or pauses, develop in a three-wave pattern. According to Prechter's analysis, the Dow Jones Industrial Average ($INDU: news, chart, profile) has completed five waves since the 1974 recession.
Hochberg, who worked as a strategist at Merrill Lynch in the early 1980s, tells me the stock rally that began in October "is clearly a correction, a counter-trend move that is tracing out what we call an 'A-B-C' pattern. This means that the October lows will be easily swept aside in the next leg of the bear."
Hochberg addressed other worrisome signs for U.S. stocks. His analysis provides compelling counterpoints to claims the 2003 stock market will enjoy its first winning year since 1999.
The sentiment of investors is way too upbeat, Hochberg says. "It remains nowhere near what is historically seen at bear-market bottoms." Investors Intelligence surveys show twice as many believers as skeptics. Yet in 1994 and early 1995, a painful period for stocks, there were nearly 40 straight weeks of more bears than bulls, "the complete opposite of today," he says.
What's more, the Standard & Poor's Commitment of Traders numbers show small investors "remain net-long S&P futures. At a true market bottom, this group of traders will be deeply net short, as they were in 1994."
Additionally, Hochberg says the percentage of mutual fund cash is at a bull market high of 5 percent, "not at a bear market bottom of 10 percent to 13 percent."
Hochberg prides himself on his data retrieval. According to Sindlinger & Co.'s weekly survey, the percentage of U.S. households in stocks is 56.7 percent, "exactly where it was at the Dow's all-time peak on Jan. 14, 2000. At a bear market bottom, this percentage will be 20 percent or lower," he tells me.
Elliott Wave theorists track what they call "super-cycles," or sweeping trends that occur rarely. "The last two times the stock market was down four or more years in a row was in the last two super-cycle declines, which is exactly what the current decline is," he says. The previous instance was 1929 to 1932. Before that, stocks fell four straight years from 1837-1841.
Hochberg also goes one better (or worse) on the super-cycle angle. "The decline from the 2000 peak is not only a super-cycle decline, but it is also a decline of one higher degree -- a grand super-cycle."
The last grand super-cycle decline began in 1720. "During this sell-off there were three periods of four or more years of consecutive declines: 1737-1740, 1743-1747 and 1758-1762," he says. Elliott Wave degrees indicate the odds are "high" that investors will suffer a fourth year of declines in 2003.
Dividends are in the news these days -- with President Bush's proposal to scrap double-taxation of corporate payouts to investors. Hochberg regards dividends as "the most important metric" in the stock market. "Fully half of the market's total return of the past 100 years has come from dividends," he says.
He points to a new study from investment managers Robert Arnott and Clifford Asness, "Does Dividend Policy Foretell Earnings Growth?" The report suggests expected future earnings growth is fastest when current payout ratios are high and slowest when payout ratios are low. (See the report.)
The current Dow Jones industrials (DIA: news, chart, profile) dividend yield of 2.19 percent is above the historic average of past bull market peaks, which is approximately 3 percent. The Dow would have to decline to 6,275, or about 30 percent from current levels, just to equal the top yield at bull market highs.
To equal the yield typically seen at bottoms, roughly 6.5 percent, the Dow would have to fall to 2,900, or almost 70 percent below today's level, Hochberg says.
Finally, Hochberg warns of the media and brokerage lines of reasoning that investors should scrutinize before throwing their 401(k) and other money into the market. One of those lines is: "Don't fight the Fed," which reduces interest rates more often than Popeye eats spinach.
"The latest hook I've read argues that relative to interest rates, the market is cheap and therefore you should buy stocks," Hochberg says. "Don't bite. Money-market funds were yielding nearly 6 percent in 2000, near the stock market's all-time high. Yields have fallen to just over 1 percent today. If falling or low yields were bullish for stocks, the market should be soaring."
Instead, the Dow is about 28 percent lower than its year 2000 peak, the S&P 500 Index (SPY: news, chart, profile) 42 percent and Nasdaq Composite 73 percent (COMP: news, chart, profile). |
