The rally is meaningless

The rally is meaningless
Commentary: Elliott Wave Financial Forecast says this will be a down year

Peter Brimelow

NEW YORK (MarketWatch) -- An investment letter that made money during the Crash of 2008 says the stock rally is meaningless and that this will be a down year.

To be fair, the Elliott Wave Financial Forecast [EWFF] said this in its monthly issue published in early July, before the recent bounce. But it anticipated this possibility, writing "The selling pressure will abate at times, but by the end of 2010, stock prices should be much lower."

Recently, I quoted EWFF anticipating a triple-digit Dow in 2016, much to the disgust of some readers. ( See June 17 column.)

EWFF has also made money over this difficult year to date, by Hulbert Financial Digest count. It's up 3.1%, versus negative 5.8% for the dividend-reinvested Wilshire 5000 Total Stock Market Index.

It was skeptical too soon of the post-March 2009 rally, so over the past 12 months it was down negative 2.13%, versus 22.89% for the total return Wilshire 5000.

But over the past three years, the letter is up annualized 5.81%, versus negative 9.36% annualized for the total return Wilshire.

In fact, EWFF has had a relatively good decade, which is another way of saying the stock market has not. Over the past ten years, the letter was up an annualized 1.51%, versus negative 1.51% for the total return Wilshire 5000.

(On the other hand, it should be noted that EWFF had an absolutely horrible time in the 1990s. See April 26, 2002 column.)

EWFF's unique selling proposition is the complex and esoteric Elliott Wave theory. But it spends a lot of time thinking about how the deflation that it believes the Elliott Theory predicts will actually play out. Its scenario for the rest of 2010:

"Credit turmoil is expanding into the municipal bond market, as the cost of insuring muni bonds relative to Treasuries is soaring. As these rates continue to rise, the toll on state and local finances will mount and many seemingly safe bond portfolios will be hard hit. Multiple non-confirmations in the precious metals complex indicate that the next major move for gold and silver is down. The U.S. Dollar index is correcting the complete rally pattern from last November. The long-term trend for the buck remains up."

In a recent interview, EWFF's founder Bob Prechter said:

"Investors should be primarily in greenback cash and Treasury bills, while holding a core position in gold-bullion coins and bags of U.S. silver coins, sometimes called 'junk silver.' They should hold no corporate bonds, municipal bonds, mortgage debt, auto debt, credit-card debt, foreign debt -- aside from Swiss money-market claims (the Swiss equivalent of T-bills) -- or any other IOUs that will soon evaporate in value. They should own no stocks or investment property. They should avoid all but the safest banks on the planet. Experienced traders should be short the S&P 500 Index Market Data Express: SPX /quotes/comstock/21z!i1:in\x (SPX 1,087, -8.56, -0.78%) ."

Prechter added: "I love gold. It's money. Our fiat system has no money, just debt. Outlawing gold as money in the U.S. was one of the most harmful decisions the government ever made. [But] gold is not a crisis hedge....In crises, people want cash. Debtors owe dollars, and creditors are owed dollars. During the serious part of the coming debt implosion, dollar bills and surviving dollar-denominated IOUs will likely go up in value faster than gold, which means the dollar price of gold will probably fall for a time."

(A reader points out that there are other Elliott Wave-oriented services -- for example Walter Murphy's Monthly Insights and Larry Katz' Market Summary and Forecast, that take a more optimistic view -- just as there are several Dow Theory letters with brawling interpretations. Unfortunately, the Hulbert Financial Digest does not follow these other Elliott services, basically because not enough of their subscribers have requested it.)

Way back when, Prechter had a rock band. He reported:

"In 2008, 34 years after my band made an LP, I started getting calls from collectors wanting copies. To make a long story short, a collectors' label called Yoga Records has decided to release the album on CD and digital download."

He added, "I think they're pricing it too low, but that's deflation for ya."