If there is an equivalent to a Star Trek convention for the investment industry, it would be a gathering of market technicians. Like “Trekkies,” technicians are an obscure minority, viewed with curiosity by some and disdain by many, mostly because of their Klingon-like language for the financial markets, which include terms like “musical polarity” and “vibrational energy.”
Earlier this year, I expressed my skepticism about technical analysis. One of our readers thought I needed a better understanding of this discipline, and invited me to the 2009 Market Technicians Association (MTA) Symposium, held in New York last week. It is the premier event for charters, attracting several hundred prominent technical analysts.
I enjoyed the event, but remain a skeptic.
The keynote speaker was Robert Prechter, who is president of Elliott Wave International and the author of 13 books on finance and the use of the Elliott Wave. Prechter is an articulate speaker, a Yale graduate, a member of Mensa, and has devoted his career to popularizing and applying the theory behind the Elliott Wave.
Ralph Nelson Elliott, known as R.N. among this crowd, developed the Elliott Wave during the Great Depression, and gained popularity as he made correct forecasts as the market reached its nadir. Prechter began studying the Elliott Wave in the 1970s, and used it to correctly predict the bull market of the 1980s, gaining fame and prominence for himself and his theories.
According to the Elliott Wave, markets move in patterns consisting of five waves, where waves 1, 3, and 5 have different characteristics from waves 2 and 4. Waves have fractal properties, and can be analyzed at successively more granular levels. Waves also have mathematical properties, and theory says the Fibonacci numbers (1, 1, 2, 3, 5, 8, …) appear regularly in stock market data, giving clues to chartists looking to forecast trends.
Prechter said the Elliott Wave is the “only true form model of the stock market” and claimed that it correctly forecast lows in 1932, 1974 and 1978, each of which represented one of the five waves in an Elliott pattern.
Prechter’s talk contained at least as much fundamental analysis as it did technical analysis. He compared dividend yields to interest rates, concluding that “in dividend yield terms, stocks are historically overvalued.” He said P/E ratios are now at 60 (I’m not sure where he gets this number – possibly using forward-looking analyst projects) and need to be as low as six or seven for a bull market to begin. Cash held by mutual funds, now at 5%-6%, needs to be in “double digits for a bear market bottom,” he said.
Prechter says the economy is headed for a period of extended deflation and the bear market has not concluded. “What’s driving this market is the liquidity situation,” Prechter said.
Prechter’s technical indicators – advance/decline ratios, ticks, new lows – are telling him the same story – until the market “breaches the trend” at the end of the fifth wave, the bear market will not end.
Underlying Prechter’s theories is the belief that markets are driven by psychology and waves of social moods, which can be observed in trends in dress, music and politics. The trend today is conservative and foretells a Japanese-like deflation, with a far smaller appetite for debt and risk on the part of the investing public.
Prechter takes a contrarian approach to investing, and claimed popular support for Peak Oil theories when oil prices topped $140/barrell were a clear signal to exit that market. Treasury bonds are now the victim of similar excess demand, and Prechter said their prices are headed lower.
