Is The Stock Market Predictable?
If you are looking for a perfect "crystal ball" that forecasts with 100% accuracy 100% of the time, it doesn't exist.
However, if you want an edge in forecasting market performance and cultural behavior and preferences, then read on. Your financial survival is at stake!
In the 1930's retired accountant R.N. Elliott documented a phenominal discovery: Stock Market prices move in very specific patterns now called "Elliott Waves". Once Elliott knew what to look for, he saw the same price patterns in bonds, commodities, precious metals, real estate, currencies, collectables - anything traded in a free market "auction style" arena and subject to mass psychology.
If you can determine what pattern the market is in, that gives you incredible insight into which direction the market will move and often precisely how far.
Although he didn't have these words back then, what Elliott documented was a "fractal geometry" of market price movement. Elliott believed he had discovered a fundamental law of nature. He concluded that only one thing moves market prices: Investor Psychology, specifically "herding instinct". When investors are optimistic, they pump money into markets, which drives up prices. When investors are pessamistic, they stop buying and start selling, which drives down prices.
Several others have followed in R.N. Elliott's footsteps including Hamilton Boulton, A.J. Frost, and most recently Robert Prechter and his team at Elliott Wave International
What are the Elliott Waves telling us now?
Elliott Wave International's best interpretation is that we are in the early stages of massive deflationary depression one order of magnitude greater than the "Great Depression" of the 1930's. This one is more like the crash of the 1780's - we can expect unemployment in the area of 25-30% (that is not a typo, they are forecasting one out of every three people unemployed).
Robert Precter shared that forecast, and survival strategies, in his best selling books: Conquer the Crash: You Can Survive and Prosper in a Deflationary Depression, Expanded and Updated Edition and At the Crest of the Tidal Wave.
The first half of "Conquer The Crash" details Prechter's forecast for the coming depression and includes more than just Elliott Wave analysis. Some of his charts will scare the hell out of you. But, it is only bad news if you are unprepared. For those who anticipate the crash and plan accordingly, it represents the financial windfall of a generation. Those who are blindsided, caught unprepared, will likely be financially devastated.
The second half of "Conquer The Crash" deals with survival strategies e.g. finding the safest and optimum investments, healthiest financial institutions, rating services that assess the health of banks, credit unions, brokerage house, and insurance companies.
The best book I've found is Elliott Wave Principle: Key to Market Behavior (Wiley Trading Advantage) by A.J. Frost and Robert Prechter.
Their book covers the rules, guidelines, and theory behind the wave principle.
Does Elliott Wave work?
In 1984 Robert Prechter used Elliott Wave analysis to compete in a four month United States Trading Championship. In just those four months he set an all time record 444.4% return on investment.
I've applied the technique to individual stock forecasting. I rely on Elliott Wave International's (EWI) forecasting services to give me the "big picture" and I do my own charting to (try to) anticpate what EWI will say and to forecast individual stocks. I'm still not very good at it yet but thanks to Elliott Wave, I tend to "win big" and "lose little" - and I am improving over time. Some of my better stock trades in the last year (% yield and # days held): 53% yield in 140 days, 38% in 13 days, 27.9% in 14 days, 21.4% in 24 days, 18% in 6 days, 15.7% in 4 days, 13.9% in 8 days, 13.7% in 17 days, 13% in 2 days, 11.5% in one day.
Elliott Waves are very valuable for investment forecasting but their value goes way beyond that.
Robert Prechter is pioneering a new science he calls "Socionomics". He published a two book set on his findings: Socionomics: The Science of History and Social Prediction.
Conventional wisdom is that outside events influence our social mood and stock market performance. Socionomics believes the opposite: that social mood creates events and determines stock market performance.
It turns out the same psychology that drives our investing decisions also drives many other cultural events, decisions, and preferences. A lot of things correlate to stock price movement. It's not a "cause and effect" relationship, it's "effect and effect". The cause is our cultural mass psychology, stock prices just reflect social mood earlier than many of the other indicators.
- Fashion follows the markets Hemlines rise and fall with the market - hemlines get shorter in up markets (aka bull markets), hemlines get longer in down markets (aka bear markets).
- Presidential election results correlate to market performance
- Best selling movies correlate to the markets
- Our taste in music correlates to the markets In bull markets we like cheerful peppy music e.g. "big band era", Rock and Roll, Surf Music, Bubble Gum Music. In bear markets we want the opposite e.g. slow depressing ballads, hard rock, acid rock, punk rock, "cop killer rap".
- Every major war of the last 200+ years happened in about the same place in an Elliott Wave The size of the war was commensurate to the size of the wave: big wave, big war; small wave, small war.
- Nuclear weapons testing correlate to the markets In Volume 1 of his Socionomics series, Robert Prechter charted number of nuclear weapons exploded each year during testing, turned it upside down, and superimposed it on the Dow Jones Industrial Average for the same time period. It was an almost exact fit! Apparently when markets are down, we're feeling irritable, we're probably going to go to war with somebody, need to make sure our most potent weapons are well tested. When markets are up, we're optimistic, we "love thy neighbor", don't want to fight with anyone, so no need to test our weapons.
- Heroes and Scandals correlate to the markets During bull markets we create heroes and celebrities. During bear markets we "tear them down", we turn to anti-heroes and scandals. DC Comics created the character Superman during a bull market. They killed him during a bear market, they brought him back in a bull market. In March of 2007 Marvel Comics killed Captain America - death by sniper's bullet. The "Great Bear" mauled another American Icon.
Elliott Waves and Socionomics compliment each other
You can use cultural events, trends, and preferences to corroborate Elliott Wave forecasts. You can use Elliott Waves to forecast, in general terms, cultural trends.
Do you want to learn more?
- Elliott Wave International provides Elliott Wave based market forecasting services, training, and reports at: www.ElliottWave.com.
- The Socionomics Foundation at www.socionomics.org.
is a 501(c)(3) non-profit private operating foundation dedicated to advancing socionomics, the science of social prediction pioneered by Robert R. Prechter Jr. The Socionomics Foundation provides education and funds research exploring socionomic theory and how it can benefit individuals and institutions through a better understanding of the dynamics of social and cultural change.
- The Socionomics Institute at www.socionomics.net publishes
- "The Socionomist" - a monthly publication focused on helping you prepare for important social changes that most people never see coming.
- Several free articles providing valuable Socionmic insights esp. re: current events
- Free streaming video of the "History's Hidden Engine" documentary on Elliott Waves and Socionmics
Other great resources for Elliott Waves and Socionomics include:
What experiences have you had with Elliott Waves? What other investment forcasting tools and methods have you found to be effective?