Why the Timing of the Next Economic Slump May Surprise -- Big Time

"The stock market leads GDP," not the other way around

By Elliott Wave International

Do you recall how many government officials, economists or bankers anticipated the severity of the "Great Recession" before late 2007 into 2009?

Do you recall even one?

If a name doesn't come to mind, that's because hardly anyone of prominence provided a warning. Indeed, just the opposite.

Here's a March 29, 2007 NBC News headline:

U.S. economic growth revised up

Granted, this view by a group of economists was early in 2007, but still -- a historic stock market top was then only six months away and the start of the Great Recession was only eight months down the road.

The public thought the smooth sailing would continue as late as mid-year of 2007.

Look at this quote from a June 20, 2007 Pew Research Center article:

Most Americans expect that the good times will continue for homeowners and sellers.

Alas, the makings of the "subprime mortgage meltdown" were already in place and poised to jar the entire global financial system.

Knowledge at Wharton is the name of a business journal from the Wharton School at the University of Pennsylvania and after the worst of the financial crisis, it offered a May 2009 retrospective with the title:

Why Economists Failed to Predict the Financial Crisis

The whole point is that the worst economic slump since the Great Depression was largely unanticipated. Why? As Elliott Wave International has stated many times, most people tend to linearly extrapolate present conditions into the future. And, those conditions had been largely positive for several years prior to the financial crisis, i.e., a booming housing market and rising stock prices.

It's not the first time financial and economic observers have been sorely surprised, as this Barron's headline states (October 20, 2021):

The 1929 Stock Market Crash Caught Nearly Everyone Off Guard ...

Here in May 2022, there are professional economic observers who anticipate a slowdown in the economy but that's not exactly going out on a limb. Meaning, almost everyone and their uncle believe the Fed tightening will cause the economy to slow. Besides, the economy has already contracted. It did so by 1.4% in Q1.

What may surprise is the extent of the next economic slump -- as well as its timing. Almost everyone expects the economy to turn down first and the stock market to follow, but remember that both the Great Recession and the Great Depression developed following historic tops in the stock market. In other words, the bigger the bear market in stocks, the bigger the subsequent economic contraction (conversely, the bigger the bull market, the bigger the economic expansion).

Yes, stocks lead the economy, not follow. The evidence is supplied by a chart and commentary from Robert Prechter's landmark book, The Socionomic Theory of Finance:

The stock market leads GDP. As the stock market fell in Q1 1980 and again in 1981-1982, back-to-back recessions developed. As the stock market rose from 1982 to 1987, an economic boom occurred. After stock prices went sideways to down from 1987 to 1990, a recession developed. As stock prices resumed rising, the economy resumed expanding. As the stock market fell in 2000-2001, a recession developed. As the stock market recovered in 2002-2007, an economic expansion occurred. As the stock market fell in 2007-2009, a recession developed, and it was commensurate with the size of the drop: The largest stock market decline since 1929-1932 led to the deepest recession since 1929-1933. As the stock market has recovered since 2009, an economic expansion has developed.

As you probably know, that recovery in the Dow Industrials and S&P 500 index since the 2009 low extended all the way into January of this year.

If the financial downtrend that's unfolded since then is the start of a big bear market, the next economic contraction may be much more severe than many observers anticipate.

Hence, it's important to keep your eye on the stock market's Elliott wave structure so you can prepare for what is likely next -- both for stocks and the economy.

If you're new to Elliott wave analysis or need a refresher, you are encouraged to read Frost & Prechter's Elliott Wave Principle: Key to Market Behavior. Here's a quote from the book:

In markets, progress ultimately takes the form of five waves of a specific structure. Three of these waves, which are labeled 1, 3 and 5, actually effect the directional movement. They are separated by two countertrend interruptions, which are labeled 2 and 4. The two interruptions are apparently a requisite for overall directional movement to occur.

[R.N.] Elliott noted three consistent aspects of the five-wave form. They are: Wave 2 never moves beyond the start of wave 1; wave 3 is never the shortest wave; wave 4 never enters the price territory of wave 1.

Get more insights into the Wave Principle by reading the entire online version of the book for free.

All that's required for free access is a Club EWI membership, which is also free.

Club EWI is the world's largest Elliott wave educational community with approximately 500,000 worldwide members. Hop on board and you can enjoy complimentary access to a wealth of Elliott wave resources on investing and trading without any obligations.

Just follow this link and you're on your way: Elliott Wave Principle: Key to Market Behavior -- free and instant access.

This article was syndicated by Elliott Wave International and was originally published under the headline Why the Timing of the Next Economic Slump May Surprise -- Big Time. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Stocks: Is the Really Scary Part Just Ahead?

Here's one of the actions which investors take when they get "rattled"

By Elliott Wave International

Big daily selloffs have occurred since the stock market's downtrend began in January.

For instance, on May 18, the Dow Industrials closed lower by 1,161 points -- a 3.6% drop. The S&P 500 shed 4% on the same day.

Yet, most investors aren't exactly shaking in their boots. Panic is absent.

After the market close on May 18, the U.S. Short Term Update, a thrice weekly Elliott Wave International publication which analyzes near-term trends for major U.S. financial markets, showed this chart and said:

Traditional measures of investor complacency and panic, such as the CBOE Volatility Index (VIX), remain somewhat subdued relative to prior extremes over the past six months. One of the ways we measure the level of investor panic is to compare the one-month VIX futures contract to the three-month VIX futures contract, which is shown by the histogram at the bottom of the chart. When investors are rattled, they bid the short-term contract (one month) above the longer-term contract (three month), feeling as if they need "protection" from a falling market now versus later (see grey ellipses).

During the most vicious phase of a major bear market, the spread between the one- and three-month futures contract should dramatically soar.

In the meantime, there was this headline just two days after that big May 18 selloff (CNBC, May 20):

These are the cheapest stocks in the S&P 500 that could be buying opportunities

Yep, many market participants are still viewing the drop in prices as a time to go bargain hunting rather than running for the hills.

Memories of the longest bull market in history die hard. Remember, it started back in March 2009.

However, panic will set in when the downtrend reaches a "third of a third" Elliott wave. If you're new to Elliott wave analysis, the third of a third is the strongest part of a trend -- both up and down.

Want more U.S. markets insights like this?

Check out Elliott Wave International's new report, "Bitten by FANG? Clocked by Cryptos? -- "Air Pockets" Everywhere."

Down more than 25%, the NASDAQ is "officially" in bear-market territory.

"Big whoop" as they used to say -- some of the hi-tech darlings have already been cut in half and then some. Bet the folks down 50% or more in their so-called investments are glad to hear they're "official."

And now Bitcoin, the King of Cryptos, has hit an "air pocket" of its own and fallen below $30,000. Wonder if that's officially a bear market, too?

This excerpt from EWI's May Financial Forecast explains how it all fits together.

Sign up for Club EWI -- FREE -- and read it now.

This is "Anything but Positive for Housing"

Has the rise in mortgage rates only begun?

By Elliott Wave International

A tug-of-war between bullish and bearish forces appears to be playing out in the U.S. housing market.

On the one hand, some areas of the country are still experiencing record-high home prices as buyers outnumber sellers.

On the other, the number of home sellers who dropped their asking price spiked to a six-month high of 15% during a four-week period ending on May 1, according to a Redfin report released on May 6.

Another development that falls in the bearish category for residential real estate is rising mortgage rates.

Here's what the April Elliott Wave Financial Forecast, a monthly publication which provides analysis of major U.S. financial markets, noted as it showed this chart:

The rising interest-rate story is anything but positive for housing. This chart shows a surge in the cost of financing a home. Over the last 15 months, the Freddie Mac 30-year mortgage rate rose from a record low 2.65% to 4.67%, a 76% increase. ... As the chart title suggests, mortgage rates have much higher to go.

In fact, about a month after that commentary published, a May 9 Fox Business news item said:

The 30-year fixed-rate mortgage surged to 5.27% annual percentage rate (APR) for the week ending May 5, 2022, according to Freddie Mac. ...

That's the highest 30-year fixed mortgage rate since 2009.

As the Campbell Real Estate Timing Letter noted (May 15):

In April 2022, a $1,000 principal and interest mortgage payment currently affords a loan that is 30% smaller than at the beginning of 2021.

Now, let's mention another bearish factor for U.S. housing -- and that's the action of the stock market.

You see, the stock and real estate markets tend to be highly correlated. They may not be in perfect synchronization, but generally, they both tend to rise and fall together.

And, as you probably know, the Dow Industrials and S&P 500 index have been in a downtrend since January.

Now is the time to pay close attention to the Elliott wave structure of the stock market, which, as mentioned, can help you get a handle on the housing market.

If you need a refresher on Elliott wave analysis, or are entirely new to the topic, you are encouraged to read Frost & Prechter's Wall Street classic, Elliott Wave Principle: Key to Market Behavior. Here's a quote from the book:

In the 1930s, Ralph Nelson Elliott discovered that stock market prices trend and reverse in recognizable patterns. The patterns he discerned are repetitive in form but not necessarily in time or amplitude. Elliott isolated five such patterns, or "waves," that recur in market price data. He named, defined and illustrated these patterns and their variations. He then described how they link together to form larger versions of themselves, how they in turn link to form the same patterns of the next larger size, and so on, producing a structured progression. He called this phenomenon The Wave Principle.

Although it is the best forecasting tool in existence, the Wave Principle is not primarily a forecasting tool; it is a detailed description of how markets behave. Nevertheless, that description does impart an immense amount of knowledge about the market's position within the behavioral continuum and therefore about its probable ensuing path. The primary value of the Wave Principle is that it provides a context for market analysis.

You can learn more about the Wave Principle by reading the entire online version of the book for free!

All that's required for free access is a Club EWI membership.

Club EWI is the world's largest Elliott wave educational community and is free to join.

You may be interested in knowing that Club EWI members enjoy complimentary access to a wealth of Elliott wave resources on investing and trading with zero obligations.

Just follow this link to get started: Elliott Wave Principle: Key to Market Behavior -- free, unlimited and instant access.

This article was syndicated by Elliott Wave International and was originally published under the headline This is "Anything but Positive for Housing". EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Stock Markets: "What Happens When the Dip Keeps Dipping?"

These can "work tirelessly to keep investors trapped on the wrong side of a bearish trend"

By Elliott Wave International

It's been a rocky road for the Dow and the S&P 500 index since the start of the year. And, even longer for the NASDAQ, which topped back in November.

Indeed, speaking of technology stocks, some of the most popular names took a big beating in April alone. As the Wall Street Journal noted (April 29):

The FAANG stocks, consisting of the popular quintet of Facebook parent Meta Platforms, Apple, Amazon.com, Netflix and Google parent Alphabet, have collectively lost more than $1 trillion in market value [in April], the most since Facebook started trading in May 2012.

So, you might think that this bumpy ride in the stock market would have many investors at least considering moving to the sidelines, especially those with a sizeable nest egg to protect.

Well, according to a UBS Investor Sentiment survey of millionaire investors -- conducted between April 5 and April 18 -- most of those surveyed plan to stick with stocks.

Here's a May 4 CNBC headline:

More wealthy investors would rather hold or add stocks than sell if markets keep sliding, survey says

Granted, this survey was taken before some of the roughest trading days in April. Still, it shows a recent willingness by even the "cream of the crop" in society to "buy the dip."

No doubt, that same lingering bullishness has persisted in other nations too.

With that in mind, the April Global Market Perspective, a monthly Elliott Wave International publication which provides analysis of 50-plus worldwide financial markets, provided an object lesson in buying the dip, using past bear markets in Germany's DAX as examples:

[These two graphs illustrate] the multi-week and multi-month rallies that work tirelessly to keep investors trapped on the wrong side of a bearish trend. The left graph depicts every plus-10% rally from March 2000 to March 2003, a three-year span that saw the DAX drop by 74%. The right graph illustrates the bear market from July 2007 to March 2009, which saw seven rallies of 10% or more.

So, "buying the dip" can be a financially dangerous strategy.

In our view, it's best to consult a financial market's Elliott wave structure before making a decision about your portfolio.

If you'd like to learn how the Elliott wave model can help you analyze financial markets, you are encouraged to read Frost & Prechter's Wall Street classic, Elliott Wave Principle: Key to Market Behavior. Here's a quote from the book:

"When you have eliminated the impossible, whatever remains, however improbable, must be the truth." Thus eloquently spoke Sherlock Holmes to his constant companion, Dr. Watson, in Arthur Conan Doyle's The Sign of Four. This advice is a capsule summary of what you need to know to be successful with Elliott. The best approach is deductive reasoning. By knowing what Elliott rules will not allow, you can deduce that whatever remains is the proper perspective, no matter how improbable it may seem otherwise. By applying all the rules of extensions, alternation, overlapping, channeling, volume and the rest, you have a much more formidable arsenal than you might imagine at first glance. Unfortunately for many, the approach requires thought and work and rarely provides a mechanical signal. However, this kind of thinking, basically an elimination process, squeezes the best out of what Elliott has to offer and besides, it's fun! We sincerely urge you to give it a try.

You can read the entire online version of Elliott Wave Principle: Key to Market Behavior for free once you become a Club EWI member!

Club EWI is the world's largest Elliott wave educational community and is free to join. Members enjoy free access to a wealth of Elliott wave resources on investing and trading.

Get started by following this link: Elliott Wave Principle: Key to Market Behavior -- free, unlimited and instant access now.

This article was syndicated by Elliott Wave International and was originally published under the headline Stock Markets: "What Happens When the Dip Keeps Dipping?". EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Is Bitcoin Headed to Zero?

"40% of bitcoin investors are now underwater"

By Elliott Wave International

Charlie Munger is Berkshire Hathaway's co-chairman, and on April 30 at the firm's shareholder meeting, he said:

[Bitcoin] is stupid because it's very likely to go to zero.

Berkshire Hathaway chairman Warren Buffet also expressed a negative sentiment toward the cryptocurrency.

Bitcoin's recent price action appears to support the views of the two billionaire investors, at least at this juncture.

Here's a CNBC headline from the evening of May 9:

Bitcoin dips below $30,000, drops more than 56% from its all-time high

Keep in mind that just days ago, the cryptocurrency was trading north of $40,000. The last time Bitcoin traded below $30,000 was last July. As you might imagine, many crypto investors were quite fearful then.

Indeed, a July 9, 2021 Bloomberg headline captured the sentiment of the global chief investment officer of a major financial firm:

Bitcoin 'Crash' Risks Taking Its Price Down to $10,000

However, the cryptocurrency's Elliott wave structure suggested that its price was poised to move higher. The July 2021 Global Market Perspective, an Elliott Wave International monthly publication which provides analysis of 50-plus worldwide markets, said:

Bitcoin [is] at or near the end of its fourth wave-correction.

In other words, the then slide in Bitcoin's price was a countertrend move.

After that July 2021 low, Bitcoin went on to hit an all-time high of $68,906 in November 2021.

Of course, Bitcoin's price has taken a tumble once again.

Might this time be the time of a collapse?

It sure feels like it to a lot of investors (May 9, CNBC):

40% of bitcoin investors are now underwater, new data shows

These investors are naturally wondering, "what's next?"

The recently published May Global Market Perspective once again provides an Elliott wave perspective on Bitcoin's price action.

Remember, Elliott waves are a direct reflection of the repetitive patterns of investor psychology and these patterns offer "predictive value," as noted by Frost & Prechter's Wall Street classic, Elliott Wave Principle: Key to Market Behavior.

This doesn't mean that Elliott waves guarantee an exact future price path of a financial market, yet, Elliott waves do offer context.

One thing's for sure, there's a wide chasm between Charlie Munger's comments that Bitcoin will likely go to zero and other forecasts that say Bitcoin is headed toward a million dollars.

Elliott waves help you to put the big Bitcoin picture into perspective.

You'll find our Bitcoin analysis [as well as analysis of other cryptocurrencies], which includes charts, commentary and a video, under the "Cryptocurrency" section in the May Global Market Perspective.

Here's the good news: Now through May 18, you can test-drive the Global Market Perspective for only $9. That's a $50 savings!

See what Elliott Wave International's global analysts anticipate next for 50-plus global markets: U.S., European and Asian-Pacific stocks, FX, cryptos, bonds, oil, gold and much more.

Learn more about this rare chance to test-drive the Global Market Perspective for only $9 -- which means access to the May 2022 issue -- by following this link.

How to Recognize a Less-Than-Obvious Opportunity (In focus: Corn)

Here's a new, FREE report (valued at $49) that ensures you will do just that

By Elliott Wave International

When I was growing up, my father owned and operated a furniture manufacturing company. Its products stocked the shelves of several well-known retail stores across the country, including Walmart.

On the cover of one of his most popular products, a simple D.I.Y. end table, was a picture of the fully assembled table with a framed photograph of a smiling young girl holding a Persian cat. That young girl was me, and the cat was my childhood pet Princess.

Naturally one day the inevitable happened. My dad and I were shopping at Walmart, and we passed a woman with one of his boxed DIY tables in her cart. She looked at me, then at the face staring back at her on the cover of the box, and then again at me.

Visibly shaken, she braved her way over to my dad and asked if, in fact, I was the girl on the box. Without skipping a beat, he grinned and said he saw the resemblance but no, I was not her and we were on our way. I couldn't help looking back to see the woman, standing there glued in place with an utterly baffled expression.

Out of earshot, I asked my dad why he lied. "Trust me," he replied. "We don't want your head getting so big we have to strap you to the roof of the car."

Here's the thing: Every day, "fundamental" analysts say they see the corresponding bullish or bearish news event reflected on the surface of a specific market's fundamental "pool."

Take, for example, the recent rally in corn prices to all-time record highs on April 26. Mainstream analysts cite one catalyst for the grain's gains: The Ukraine war, seeing as Russia and Ukraine account for approximately 20% of the world's corn exports.

From Aljazeera on April 8:

Russia and Ukraine, whose vast grain-growing regions are among the world's main breadbaskets, account for a huge share of the globe's exports in several major commodities, including wheat, vegetable oil and corn, their prices reached their highest levels ever last month.

But if you take a closer look at corn's rally, you'll see the gains began back in October 2021 -- four months before Putin declared his "special military operation" in Ukraine on February 24.

In turn, the mainstreamers were looking at the wrong reflection; namely, that of "market fundamentals," which only show you what's behind, not ahead.

That's where the Wave Principle steps in. For those new to the Wave Principle, it's a form of technical analysis that uses chart patterns and other indicators to anticipate market turns.

It's founded on these core observations:

• Market trends are driven by correlate trends in collective investor psychology
• Investor psychology progresses in 2 modes: impulsive and corrective
• Identifying these patterns correctly can illuminate the near- and long-term path for prices

Recently, we asked three of our top analysts here at Elliott Wave International what pattern or indication they look for most to indicate an important change. The results were too good not to share -- and turn into a FREE ($49 value) resource titled "5 Easy-to-Spot Chart Set-ups to Help You Nail Market Reversals."

This 5-part, all-video collaboration is a masterclass in identifying and implementing these high-confidence arrangements.

Set-up #2 is taught by EWI analyst Jeffrey Kennedy and focuses on the Elliott wave pattern known as an ending diagonal, defined as:

"This is a terminating wave pattern that may form in the fifth wave position of an impulse or as wave C of an ABC formation. As you can see here, it consists of five waves, waves 1, 2, 3, 4, 5.

"This is why ending diagonals are so formidable. They tend to lead to sharp reversals in price back to beyond the origin of the pattern."

(Jeffrey Kennedy is also the editor of several EWI subscription services including Trader's Classroom and Commodity Junctures Service)

In his 5 Easy-to-Spot Chart Set-ups to Help You Nail Market Reversals video, Jeffrey shows you an example of an ending diagonal that occurred in gold prices back in 2013, which led to a $50/ounce drop.

We can also show you an example in the recent history of corn, one that set the stage for its powerful surge long before the Ukraine war began. Here, in his November 2021 Monthly Commodity Junctures, Jeffrey recognized this pattern in a terminating wave C and heeded its potential for signaling sharp, swift reversals:

"Basis the March contract, I believe we have an ending diagonal that terminated in October, so now the stage is set for further rallymoving forward to roughly $7 a bushel.

It's going to be exciting watching this market continue to climb higher in the months ahead.

"I do expect corn ... to make new highs above those we saw in May."

In March, corn touched Jeffrey's initial target. The March Monthly Commodity Junctures' Wave Watch segment presented a new forecast for the grain in which Jeffrey said he "will be looking for further rally up to 801."

And this final chart captures the full range of grain's magnificent gains.

Now you understand why the ending diagonal was included in our "5 Easy-to-Spot Chart Set-ups to Help You Nail Market Reversals" video, and why Jeffrey Kennedy was the chosen instructor for that video lesson.

In it, Jeffrey leaves no questions about this pattern unanswered, including:

• Where they can occur
• How to recognize them on a price chart
• 2 cardinal rules pertaining to each subwave
• And how to time reversals following the pattern

In turn, each of the five lessons from this FREE report are in the best possible hands. And so, you too will be.

Become part of our rapidly growing online Club EWI community and get instant access to the complete "5 Easy-to-Spot Chart Set-ups to Help You Nail Market Reversals" report.

Interest Rates: The Warning That Few Wanted to Heed

Here's an update on this "hugely dangerous bet"

By Elliott Wave International

Back in mid-2020, a common sentiment toward interest rates was that they would stay historically low for the foreseeable future.

Indeed, in July of that year, no less than the Bank of Canada governor said (BNN Bloomberg):

'Interest rates will be low for a long time': Macklem

The next month, in August 2020, a Wall Street Journal headline used more dramatic language than "foreseeable future":

Low Rates Forever!

In the same month and year, one chief investment officer also used the word "forever" in regard to low rates by saying, "We are moving from low for longer to low forever."

The reason the mainstream was SO convinced was simple: 2020 was the first year of the pandemic, and it was widely believed that low rates would have to stay "forever" to "stimulate the economy."

So, the July 2020 Elliott Wave Financial Forecast, a monthly publication which offers analysis of major U.S. financial markets, was going squarely against the prevailing sentiment toward interest rates when it showed this chart and said:

The declining line in blue on this chart is the Bloomberg Barclays U.S. Aggregate Corporate Bond Yield, which is at a record low 2.15%. The rising line in red is the Bloomberg Barclays U.S. Aggregate Corporate Duration, which is at a record high 8.6. Bond duration is a measure of how sensitive prices are to a move in interest rates. ... Bond investors are now making a hugely dangerous bet that interest rates will stay low forever.

Fast forward to the April 2022 Elliott Wave Financial Forecast. Here's a chart which shows you what has happened since that July 2020 analysis:

The chart updates both corporate yields and corporate durations. Corporate yields declined slightly further, to an all-time low at 1.74% on December 31, 2020, but they have since surged to 3.76%, more than doubling.

So much for the "low forever" sentiment.

Indeed, on April 14, a Bloomberg headline said:

Corporate Bond Rout is So Severe History Books Need a Revision

And, relatedly, on May 2, a CNBC headline noted:

10-year Treasury yield tops 3% for first time since 2018

And, given the Fed has historically followed the market, another CNBC headline -- this one from May 4 -- is not surprising:

Fed raises rates by half a percentage point -- the biggest hike in two decades -- to fight inflation

Now is the time to learn what Elliott wave analysis reveals about what to expect next for bond yields (or interest rates).

If you're new to Elliott wave analysis, or need to freshen up on your knowledge, the ideal book to read is Frost & Prechter's Elliott Wave Principle: Key to Market Behavior.

Here's a quote from this Wall Street classic:

Although it is the best forecasting tool in existence, the Wave Principle is not primarily a forecasting tool; it is a detailed description of how markets behave. Nevertheless, that description does impart an immense amount of knowledge about the market's position within the behavioral continuum and therefore about its probable ensuing path. The primary value of the Wave Principle is that it provides a context for market analysis. This context provides both a basis for disciplined thinking and a perspective on the market's general position and outlook. At times, its accuracy in identifying, and even anticipating, changes in direction is almost unbelievable.

Here's the good news: You can access the online version of the book for free once you become a Club EWI member.

Club EWI is the world's largest Elliott wave educational community and members enjoy complimentary access to a wealth of Elliott wave educational resources, including Elliott Wave Principle: Key to Market Behavior. Club EWI is free to join and you can benefit from all of the free educational resources (videos and articles on financial markets and investing) without any obligation whatsoever.

Just follow this link to get started: Elliott Wave Principle: Key to Market Behavior -- free and instant access.

This article was syndicated by Elliott Wave International and was originally published under the headline Interest Rates: The Warning That Few Wanted to Heed. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Why Most Equity Mutual Funds Are (Again) Ill-Prepared for a Bear Market

Professional money managers herd "right along with other speculators"

By Elliott Wave International

Is a bear market already underway in the U.S.?

Only time will tell for sure. What is known is that the Dow Industrials and S&P 500 index topped in January and the NASDAQ registered a peak back in November.

Indeed, here's an April 29 Wall Street Journal headline:

Tech Rout Drags Nasdaq to Worst Month Since 2008

Of course, it's possible that all three indexes could roar back, but if a bear market is underway, equity mutual funds are ill-positioned.

The April Elliott Wave Financial Forecast, a monthly publication which provides analysis of major U.S. financial markets, explains why with this chart and commentary:

By historical standards, equity mutual fund managers hold record low levels of cash relative to their total assets. In December, the ratio fell to 1.9%, matching the ... lowest [reading] on record. The latest reading, 2.1% in January, is lower than all but nine monthly readings since the mid-1950s.

So, equity mutual funds were nearly fully invested in the stock market around the time of the January peaks in the Dow and S&P 500 index.

Historically, this is not surprising, as this chart and commentary from Robert Prechter's landmark book, The Socionomic Theory of Finance, reveal:

It is widely known that professional money managers, in the aggregate, fail to beat the market. The result is not, as some theorists say, because the market moves randomly. It is because most professionals are herding, right along with other speculators. [The chart shows] that at good prices for buying stock, mutual fund managers have high levels of cash, and at good prices for selling, they have low levels of cash.

The cash percentage of equity mutual funds is just one indicator to consider.

The primary factor that our analysts study is the stock market's Elliott wave structure.

If you're unfamiliar with Elliott wave analysis, you are encouraged to read Frost & Prechter's definitive text on the subject: Elliott Wave Principle: Key to Market Behavior.

Here's a quote from this Wall Street classic:

What the Wave Principle provides is a means of first limiting the possibilities and then ordering the relative probabilities of possible future market paths. Elliott's highly specific rules reduce the number of valid alternatives to a minimum. Among those, the best interpretation, sometimes called the "preferred count," is the one that satisfies the largest number of guidelines. Other interpretations are ordered accordingly. As a result, competent analysts applying the rules and guidelines of the Wave Principle objectively should usually agree on both the list of possibilities and the order of probabilities for various possible outcomes at any particular time. That order can usually be stated with certainty. Do not assume, however, that certainty about the order of probabilities is the same as certainty about one specific outcome. Under only the rarest of circumstances do you ever know exactly what the market is going to do. You must understand and accept that even an approach that can identify high odds for a fairly specific event must be wrong some of the time.

Learn about the "highly specific rules" of the Wave Principle by reading the entire online version of the book for free.

This free access to Elliott Wave Principle: Key to Market Behavior is available to Club EWI members.

Club EWI is the world's largest Elliott wave educational community and is free to join. Once you become a member, you'll have complimentary access -- not only to Elliott Wave Principle: Key to Market Behavior -- but a lot of other Elliott wave resources on financial markets and investing. New educational resources (videos, articles, etc.) are periodically added, so you can always look forward to fresh financial insights. All the while, there are no obligations whatsoever -- and, again, it's all free after a quick and simple Club EWI membership signup (there are roughly 500,000 Club EWI members worldwide).

Here's the link to get started: Elliott Wave Principle: Key to Market Behavior -- free and instant access for Club EWI members.

This article was syndicated by Elliott Wave International and was originally published under the headline Why Most Equity Mutual Funds Are (Again) Ill-Prepared for a Bear Market. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.