Closer Look At Elliott Wave Theory – Belief That The World Will Change Like None of Us Could Ever Guess

Elliott Wave Theory is based on markets moving up via sentiment in waves.  Upcycles are five waves, while contraction waves are 3 phases.  There are long-term cycles including the Grand Supercycle and Supercycle and waves of shorter duration from Cycle, to Primary to Intermediate to current Minor.  Prechter, the genius behind the model today believes we are at the end of the Grand Supercycle (Wave 3 up), Supercycle, Cycle (all Wave 5 up) etc.……all levels.  If we are at the end of the Grand Supercycle, what is ahead of us is scary.  It would be the beginning of the Grand Supercycle 4 down.

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First, let’s have a look at the updated chart of the Elliott Wave Theory from 1908 until today:

There is a great deal of data on this chart, but let me bring you to the key data to note:

  • Supercycle (IV) ended in 1932, although the depression continued, and it led to a World War
  • The current Supercycle V is currently at its end, although some argue that it ended in 2000, but has not crashed yet due to the massive debt escalation and Central Bank money printing…either way, the cycle is ending
  • Grand Supercycle is the longest cycles as you can see by the data that Prechter thinks the end of Grand Supercycle 3 is either here or close
  • You can see the shorter Cycle waves, II and IV saw crashes of 85% and 73% respectively
  • Bottom line is all wave durations are ending or very close to ending by Elliott Wave standards

The last Supercycle down was wave IV which went from 1720 until 1785:

It was a period called the South Sea Bubble.   South Sea Company, a British international trading company that was granted a monopoly in trade with Spain’s colonies in South America and the West Indies as part of a treaty made after the War of the Spanish Succession. Its shares bubbled up into 1720 to incredible heights and led to numerous other joint-stock companies IPO’d to take advantage of the booming investor demand for speculative investments. Many of these new companies made outrageous and often fraudulent claims about their business ventures for raising capital and boosting their stock prices.

The result was a massive crash in stocks that led to a challenging fiscal period of over 60 years.  One could argue that there are many investments today such as cyber currencies and several tech companies that are reminiscent of such a period.  Bottom line, is these Grand Supercycle Wave down are painful.

The last Supercycle down cycle began in 1929 with the stock market crash, leading to the Great Depression and World War II.  We are one cycle higher than this at this juncture of the cycle, simply meaning that Elliott Wave expects this next period of contraction worse than the 1930’s.

Here is a chart that shows what is expected from the next Wave down:

This clearly would lead to massive economic downside, crash in real estate prices, major job losses and overall deflationary, depressionary conditions.  The question we must all ask ‘is such a period possible’ as Prechter and his team do not have a crystal ball.

Elliott wave analysis involves deciphering the psychological orientation of the investment crowd through the wave patterns evolving in various stock markets. Therefore, we would have to look and see if sentiment and signs are there that back that we are at the end of a massive cycle. Here are 15 realities that should make us step back and wonder what is going on:

  1.  In Q1 2017, global debt hit a new all-time high of $217 trillion, or over 327% of global GDP, up $50 trillion over the past decade according to the latest IIF analysis.
  2. Low-quality debt (junk debt) has been issued at record levels during the past eight years
  3. Student debt and auto loans are at all-time highs and has soared over the last decade
  4. The massive stimulus has been in place like never before, but growth has been extremely slow, showing how fragile economies are worldwide.
  5. Government debt in 2001 was at $18.35 trillion. Today it is over $63 trillion, an increase of about $45 trillion or 250%
  6. In some countries like all of Scandinavia, Australia, Canada and the UK, household debt is at historically high levels and is reliant on home asset values holding up and economic growth
  7. In these countries, many major world organizations state their real estate is in a bubble and at risk of bursting which would kill their economies
  8. Stock markets are trading at some of the highest valuation levels in history
  9. We are at some of the highest levels ever of income and asset inequality
  10. Movement towards ‘populism’ which we have not seen since the mid-1930’s
  11. Demographics are working against growth, as the developed world is aging. This has led to the lowest GDP growth level coming out of recession since WW II
  12. Corporate equity values relative to GDP are as overvalued at any point in history other than 2000
  13. Major Central Banks (US Feds, European Central Bank, Bank of Japan) have printed over $10 trillion in the past ten years – unprecedented in history
  14. Interest rates are at historically low levels, with high risk if they increase due to all the debt relying on low-interest rates
  15. Movement towards nationalism and independence as seen by Trump’s victory, Macron in France and Britain leaving the European Union

Pendulums swing as do stock markets and economies. We have been in a growth phase since 2009 and have listed over 40 sentiment indicators that show historically high levels of confidence. This is classic at the end of a cycle, but this is unprecedented at the magnitude of areas that show extremes.

As always, we use our objective market timing tool, and we still own stocks, but concerns are consistently rising.  We will provide our coaching customers with specific recommendations when our model dictates it.

Over the next couple of days, you will see a newsletter showing two major valuation tools, that again show dangerous extremes.

Matt Sammut