Popular Culture and the Stock Market
The following article is adapted from a special report on "Popular Culture and the Stock Market" by Robert Prechter. Although originally published in 1985, the report remains so timeless and relevant that USA Today described its insights in a recent Nov. 2009 article. For the rest of this revealing 50-page report, download it for free here.
Both a study of the stock market and a study of trends in popular attitudes support the conclusion that the movement of aggregate stock prices is a direct recording of mood and mood change within the investment community, and by extension, within the society at large. It is clear that extremes in popular cultural trends coincide with extremes in stock prices, since they peak and trough coincidentally in their reflection of the popular mood. The stock market is the best place to study mood change because it is the only field of mass behavior where specific, detailed, and voluminous numerical data exists. It was only with such data that R.N. Elliott was able to discover the Wave Principle, which reveals that mass mood changes are natural, rhythmic and precise. The stock market is literally a drawing of how the scales of mass mood are tipping. A decline indicates an increasing 'negative' mood on balance, and an advance indicates an increasing 'positive' mood on balance....MORE
Back in August I started a post on Prechter with:
Be very skeptical when speaking to an Elliotician. Their "alternative wave counts" mean that they can go back to any prognostication and say they just misread the waves. Sometimes I think I should just stick with my yummy chicken entrails and tea leaves recipe, but then the wavers go and get one right. Who knows?...That was Aug. 31 and he was calling the end of the bull rally. Here he is again, doubling down.
It might not exactly be news that Robert Prechter, the famous follower of the Elliott Wave theory, is bearish on the U.S. stock market.
That's because he has been playing the equity market from the short side for quite some time now.
But what is news is that, earlier this week, he became even more aggressively bearish than usual: He is now recommending that traders allocate 200% of their stock trading portfolios to shorting the stock market.
What should be your response to Prechter's latest advice?
There is no easy answer, unfortunately.
But this question does raise a whole range of fascinating issues having to do with how best to interpret not just his, but any adviser's, track record.
On the one hand, Prechter's advice over the last couple of years has been top-rated. It's not just that he was bearish during the financial meltdown -- he also did a good job of playing the various intermediate-term corrections along the way.
Consider, for example, the issue of the Elliott Wave Financial Forecast that was sent out at the end of August 2008, some 15 months ago. This issue, edited by Prechter colleagues Steven Hochberg and Pete Kendall, appeared just two weeks before Lehman Brothers went bankrupt. Soon thereafter, of course, the entire financial system came dangerously close to becoming completely unraveled, and the stock market went into a free-fall from which didn't finally stop until March of this year.
Hochberg and Kendall wrote: "The stock market is building up the necessary reserves for its next major move, a third wave decline at multiple degrees of trend. This should be the strongest decline of the bear market to date."
Right on target, as we now know.
Furthermore, only a couple of weeks after the March lows earlier this year, Prechter and his colleagues reduced their short-side exposure, anticipating that the rally would continue for some time....MORE