Robert Prechter Jr founded "the Elliott Wave Theorist" back in
1980 based upon the foundations of R.N. Elliott, discoverer of the Wave
Principle some sixty years ago. Since then, he has been an industrious and
massive promoter of the Elliott Wave principles and something of a financial
guru on Wall Street. This has developed in turn into the 'science of Socionomics"
combining social economic practice with predictive economic theory. (The
science of social analysis based on socionomic insights.)
In the past, like those who bet on horses at the track, investors looked
to previous form to predict the future. In racing, form will tell you everything
about breeding, speeds, temperament, track conditions, left hand turns,
right hand turns, sprints, genetics and will also inform you about the jockeys,
trainers and betting odds. Even so, equipped with all this information and
your own eyes to check the condition of the horse on the day, you can still
lose everything.
Socionomics is about two things. Recognizing, believing that Elliott's
Wave Theory exists, and sociology can influence the way you invest. Prechter's
central theme is that Elliott's insight is the idea that financial markets
have a law of patterned self-familiarity governed by the Fibonacci sequence
(0,1,1,2,3,5,8,13,...).
(Fibonacci lived around the year 1200 and he studied the breeding habits
of rabbits, honeybees and plants. This in turn spurred on Henry Dudeney
at the turn of the 20th century who studied cows in the same way.)
Prechter, like Elliott before him is seeking the perfect "form"
book. The key to the alchemist's cupboard that will enable him and others
who follow, predict the stock market and make a fortune. Indeed, many, The
Economist included, have stated that the market may not be random. Elliott's
idea is that prices changes in stock market indexes produce a limited number
of definable patterns, or waves. Each wave at each degree (or size) becomes
components of the waves of the next higher degree. Five waves generating
net movement. Three steps forward, two steps back. 5-3 in a Fibonacci sequence.
The model can produce some success in forecasting stock trends. More importantly,
Prechter examines social moods and trends in human attitudes, which he claims
precede compatible changes in history and culture. In basic terms, the Fibonacci
sequence and the Elliott Wave are a manifestation of a type of growth pattern
found throughout nature. Growth and decay, expansion and contraction and
are therefore with close observation of mood and trends predictable.
The first volume The Wave Principle of Human Social Behavior is a very
comprehensive and detailed text book that goes a long way to prove Elliot
Wave Theory is a very useful tool in predictive financial forecasting.
There is much here to convince the skeptic that there is a real science
behind this concept, written in an accessible style. The case studies are
interesting and valid. (I was interested in how the Elliot Wave accurately
predicted not only the highs and lows of the market but as to whom would
and wouldn't win elections. George Bush senior's defeat to Bill Clinton
fits the model perfectly and it would seem, the son may also suffer a surprise
defeat based on how social mood influences markets and politics.)
The second volume "Pioneering Studies in Socionomics" is more
recent, published in 2003 and is loaded with case studies. The central theme
is punched home repeatedly. Social mood underlies the state of the economy,
not the other way around. Rising stock prices do not improve people's moods,
people's improving mood makes stocks rise. War does not (as commonly believed)
move stock markets up, the mood that governs stock determines the propensity
for war.
Prechter and his co-editor of The Elliot Wave International Peter M Kendall
ask us to examine social trends and moods. For example, they look at the
world of rock music, cinema, fashion, and food to extrapolate trends and
moods in society. They interpret these changes in moods as where the markets
are going along "wave principles".
It is certainly true that a propensity towards love songs in the charts
indicates a rising good mood and therefore a rising market. Equally, bleak
depressing movies and heavy metal dirges could indicate a down wave. The
art is finding the upward swing or the market turn before everyone else.
Right now, we have Missy Elliot and Madonna advertising Gap. Here we have
a huge clash of icons. Interpreting it is interesting. Is Madonna there
because her career is over? Is Missy Elliot there just for the money. The
ad has been badly received in the USA and with Madonna's albums, films and
just about everything else under performing, she is a waning star cashing
in on her icon power. But wait, Gap isn't stupid. They could have gone for
someone younger, or in Missy's case, thinner. They didn't because of demographics.
Gap customers aren't 13. They are 30 plus. They grew up with Madonna. In
actual fact Gap sales are rising. With Madonna and Missy Elliot fronting
the new cord range, the core customers feel reassured that Gap is OK to
shop in again.
Prechter and Kendall observe all these things. They ask the questions about
the popularity of Coke or why McDonalds is tanking in the market place.
Is it that these companies have lost the will to live or is it mood swings?
America has moved on from sugar water and fatty burgers. American's are
getting fatter yes, but many want to be leaner, fitter, eat more healthily.
Is it a fad or a permanent market swing? The Wave principle will enable
you to understand that change.
Right now following a campaign by environmentalist against gas guzzling
SUV's, hundred of thousands of Hummers and Dodge Rams and Durangos are being
attacked by activists. The original campaign was to persuade people to stop
buying by trucks to go to the Mall in. However, following the War in Iraq
and rising energy prices (up nearly a dollar a gallon on a year ago) the
guilt by association movement has taken an ugly twist. The mood has changed.
Now more people can see that buying gas-guzzlers hurts their pockets. More
importantly, activists have crossed the line from mere protest to active
physical damage. Why? The mood has changed. (Pity the manufacturers like
Ford, Chrysler, Porche, GM, VW all bringing out newer, bigger, even less
fuel efficient cars right now. How fast can they turn the ship around to
more efficient models? Remember "compact" cars? How the Japanese
came in and trashed the big three during the fuel crisis in the seventies.
Would you want to be invested in these companies right now? Those attacks
on Hummers could spread to all kinds of superfluous vehicles and GM and
Ford are very exposed to this kind of mood switch.
The stock market may be rising in "03, but jobs are scarce. The "popular"
war against Iraq is killing US soldiers on a daily basis. More killed in
the peace than in the war now. Americans scent another Vietnam, which in
turns reminds them of recessions and bad times. If George Bush Jr isn't
on the phone to Robert Prechter to see where he stands on the Elliott Wave,
he should be. It is still the economy stupid" and America is now billions
in debt thanks to this war, and unnecessary trade sanctions (such as Steel
and Beef.) It is also in the process of relocating much of its manufacturing
to China, where people will work for two bucks a day. China in five years
could be the world largest producers of cars and they will be demanding
more an more oil contracts from the Middle East. What mood will America
be in if it can't get oil because China bought it first. What price oil
in that tight market? If you think mood doesn't affect what we do or buy
or think, ask a New Yorker about what he feels about the blackout this August
or being told it will happen again.
A real socionomics student will also think about how much energy could
be saved if America had long lasting light bulbs or energy saving legislation
in place on computers, all electronic devices. They will think about the
companies who make those products as well as companies that can manufacture
and distribute electric power more efficiently.
A political mood for making things more energy saving could be an investment
bonanza for some companies. Change the politics, change the mood.
The difficulty comes in interpreting social mood to predict the stock market.
You can study every trend and still come to the wrong conclusion. Is it
possible to tax Lattes and espressos in Seattle? Come September 16th 2003
we shall find out. The revenue is targeted at day-care for kids. If this
carries, can taxing other unhealthy things be far behind. A McDonalds"Big
Mac" tax, a Donut tax. This is exactly what Prechter is discussing.
The implication is that an acceptance of a tax on lattes means that the
mood is for social responsibility is prevalent and that could mean a Democratic
victory at the next election. A defeat could mean that Bush and selfishness
reign supreme.
Prechter writes:
Predictions involve two levels of complexity: the general character of coming
events and the specific events themselves. The primary aspects of the social
dynamic are its formological imperative, which governs the former, and its
chaotic process, which governs the latter.
In a Chapter 'World Peace, World War, Fibonacci and Elliott' he discusses
the impact of Sept 11th on America's mood and fortunes. Certainly we are
living with the consequences of that event. The war on Iraq and rising terrorist
atrocities around the world can be plotted into the Elliott Wave pattern.
Reassuringly he doesn't feel that a major "world" war could arise
until 2034 (plus or minus two years.) Nevertheless, a war of constant attrition
and rising acts of terror could continue for many years before then. Given
a literal interpretation of Fibonacci given that the Korean War lasted three
years and Vietnam lasted 8, the next war could last 21 years. That war may
have started on Sept 11th 2000. I am not sure that anyone or any civilization
could survive such a thing given the highly developed means of destruction
we have at our disposal.
Better to judge that the mood for war could change and as a result bring
a change at the top. Americans could elect people more able to negotiate
and less inclined to spill blood.
There is no doubt that reading Prechter's books could be useful and you
learn a great deal about the invisible yet utterly intrinsic importance
that social trends and moods have in shaping the wealth of the nation. It
is not just a case of watching housing starts or counting cars produced.
The educated investor has be socially aware, clued into every facet of human
life, be aware of trends and changes in places like China and Japan, as
well as Europe. It is not an easy solution, no quick short cut to riches.
Read the case studies and about how the Elliot Wave works and you will be
a better investor, able to spot dangers and make the most of opportunities
in down waves and up waves. That's no bad thing.
Every serious investor should read these works.
VOL 19 NO. 11 (DECEMBER 2002)
Sam North - Editor
editor@hackwriters.com