Hold on Tight, U.S. Stock Market Is in for a Long Bear Market
Stock-Markets / Stocks Bear Market Jan 12, 2010 - 02:28 AM GMTBy: Glenn_Neely
An Interview with Glenn Neely, NEoWave Institute - In January 2008, Glenn Neely, founder of NEoWave Institute, released a forecast announcing “The Bull Market is Over!” He predicted a 4- to 6-year bear market and a “protracted recession.” In a recent interview, Neely discussed his January 2008 forecast. In addition, he explained why, as the current Wave structure continues to unfold, the U.S. economy is facing an overarching 20-year consolidation.
Question: Glenn, in January 2008, you sent out a release stating, “The Bull Market is Over!” Now, here we are at the beginning of 2010. We’ve endured a treacherous bear market in the two years since that announcement. Can you explain why you made that forecast, why it was controversial at the time, and how your prediction has played out?
Glenn Neely:That notice was sent in the beginning of 2008. This was after a very nice five-year bull market from 2002 to the high in 2007. The event I was waiting for, based on my NEoWave additions to Elliott Wave theory, was a market decline that was bigger and faster than all previous declines occurring during the entire bull market between 2002 and 2007. With the drop in mid-January 2008, that event finally took place.
From my perspective, it wasn’t as much of a prediction as it was a fact. It was an observational event. It happened, and the minute it did, I knew that was it: The bull market was over. Even though it was controversial at the time, I was following the rules that I’ve added to Wave theory over the last 25 years. These rules allow me to make dogmatic forecasts, which often turn out to be quite right.
In that January 2008 update, I went on to say it was the beginning of a four- to six-year bear market. This wasn’t just a temporary sell-off. It was the beginning of a long, drawn-out change in economic conditions for the U.S. I indicated in that update that it was reasonable to assume the U.S. would go into a protracted recession. Multiple financial bubbles that had been in progress for a decade or two would come to an end, which would have a serious impact on our economy.
Question: Overall, the stock market had a strong bull run from 2002 to 2007. In January 2008, what were people feeling about the market, and why was this call – that the bull market was over – considered controversial?
Glenn Neely:Under Wave theory, the rally from 2002 to 2007 was a B Wave. Those typically are the most emotional, exciting periods of correction. It draws in the public, and there’s a lot of media coverage and frenzied excitement about the market.
A significant portion of the public got involved in the stock market during that advance and got trapped. The psychology present at the time was so optimistic that people became used to a market that, for the most part, went sideways and up. Therefore, any big decline was seen as a buying opportunity. Every time the market moved down, they’d think, “This is a great time to buy bargains. It’s time to jump in.”
Question: So people were optimistic, thought every dip was a buying opportunity, and thought the market would keep climbing and rallying?
Glenn Neely:Right. People were trained to be optimistic. Between 1982 to 2000, the market climbed almost relentlessly – except for the 1987 crash – for almost 20 years. Then we went through the very short-term bear market through 2002. Then, once again, we had a perpetual, consistent, upward climb in the stock market.
For most of 25 years, the stock market has recovered after big corrections. People just started to assume that’s the way it always is. Now is the first time since 1982 that a big drop hasn’t been quickly retraced, the economy is substantially worse, and things aren’t getting back to normal as quickly as they had in the past.
Question: On January 18, 2008, you predicted we would have a protracted recession with a serious impact on our economy. What alerted you to the fact that we were in for such difficult times?
Glenn Neely:If we start from the 2000 high and under Wave theory – actually NEoWave, since some Elliott Wave people might disagree with me – the drop to 2002 was Wave A of what I think will be about a 20-year corrective environment. I indicated at the high in 2000, when I was very bearish, that the stock market would drop 50% in the Dow, 60% in the S&P, and 70% in the NASDAQ. This all came to pass over that two-year timeframe. And that was the first phase of a 20-year consolidation correction in the stock market.
That decline to 2002’s low was Wave A. After an A Wave, you get a B Wave. In this case, the B Wave retraced all of Wave A, which is what I predicted in 2002 would happen. We’d get a five- to eight-year bull market, and it would go all the way back above the highs of 2000, which was the internet boom high.
As that event was coming to an end, that’s when I realized that, based on behavior and Wave structure, the B Wave was coming to an end, and the bear market would begin sometime in the near future. The event I was waiting for was a large vertical drop in price that was larger than all the previous drops from 2002’s low, all the way up to 2007’s high. The minute that happened, I knew Wave B was over.
Under Wave theory, you have to have a C Wave that is similar to the A Wave, which was the drop from 2000 to 2002. I knew this was coming once Wave B was over. The minute I could confirm Wave B was over based on the size of the drop we had in January 2008, then I knew Wave C would need to go all the way back down to the lows of 2002 – and this had to happen in a relatively short period of time.
In January 2008, I produced a long-term market forecast on the S&P (just a few days after the announcement when I said the bull market was over) that mapped out the entire bear market for the next four to six years. The red scenario was the worst-case scenario, and the green scenario was the best-case scenario. It became obvious by May 2008 that the worst-case scenario was happening.
As the January 2008 chart shows, I projected a drop in the stock market between early 2009 and early 2010. Between those dates, the S&P would drop below the 2002 low and go as low as about 550, with an ideal target around 650 and an ideal date somewhere in mid- to late-2009. As we all know now, the S&P reached 650 in spring 2009.
My January 2008 Forecasting chart indicates that the bear market will go into late 2011 or early 2012. If you go from 2007’s high and you add four to six years, you’re talking about 2011 to 2013.
Question: Glenn, your prediction has been accurate so far. And according to that Forecasting chart, we’re going to be heading south again.
Glenn Neely:Yes. There’s almost no doubt that’s going to happen because the Wave structure is incomplete. The most important thing to realize, and one of my additions to Wave theory, is time prediction that’s possible based on the Wave patterns themselves.
Look at the high in 2000 all the way through the low in 2002 and back up to the high in 2008. It’s an extremely reliable phenomenon I discovered about ABC patterns: Wave C will almost always be equal to A plus B, if the B Wave takes a lot longer time than the A Wave. So if there are dramatic time differences between those two – in this case, Wave B is about twice the time consumption of Wave A from the lowest point to the highest point of each – you add those two together and divide by two, and that gives you the ideal and extremely reliable future time target for the C Wave’s conclusion.
You’ll notice that I have the C Wave finishing at a higher point, but it still won’t be technically finished until that time period has run its course.
This brings up an interesting – almost metaphysical or astrological – discussion regarding the 2012 phenomenon. Apparently, the Mayan calendar concludes in 2012. That will be an interesting and scary year due to the negative media that will surround this event. It may be a self-fulfilling prophecy: People may work themselves into a frenzy as the economy gets worse and continues to slow down. And there will be a media barrage reminding us every day how bad things are, so people will be even more scared to spend money.
Question: Glenn, how does the psychology of the current market play out in Wave theory?
Glenn Neely:We’re now moving toward the center of a 20-year correction, and the psychology has finally started to change. Instead of a perpetual “It’s bad but will get better” kind of optimism, it’s now more like, “It doesn’t look good and will get worse.” Now, the focus is more downward than upward. The public psychology is not hopeful – it’s pessimistic and concerned. We’ll to continue to experience this for the next few years.
The C Wave psychology will bring home the fact that we’re in a bear market. It started at the high in 2000. We’ve been in it for 10 years. The public is finally starting to accept as a reality that the nearly 20-year boom period, from 1982 to the highs in 2000 and 2007, is now finished. The glory days, economically speaking, are finished for awhile.
People will reassess how they think about the future. They’ll be much more concerned about spending money. They will hoard money, try to keep their jobs, and cut back on luxury spending like vacations, cars, and boats. The economic mood will be much more survival-oriented.
Unfortunately, this will get even worse as 2020 comes around. This is just the beginning of the bad psychology that will be unfolding for a long time.
Question: In your January 2008 forecast, you said we were beginning a new four- to six-year bear market. And your January 2008 Forecasting chart shows the bear market continuing outward, for many more years to come.
Glenn Neely:Under Wave theory, there are different levels of bear markets. The larger, big-picture bear market started at the high in 2000 and will go on for about 20 years. The smaller bear market, within this larger bear market, will go on for about four to six years.
In other words, after we realize we’ve survived 2012, we’ll probably get a nice rebound, and the stock market may even go back toward the highs of 2007.
However, economically speaking, things still won’t be great for a long time. I suspect the only way the stock market can return to the highs of 2007 will be due to inflation. In the future, the actual values will be less, even though it may appear that we are at the same level. The government has been spending a lot of money for quite awhile, and this is reducing the value of the dollar. I believe we will encounter a period of deflation through 2012, followed by a period of inflation. That may bring the market back to the old highs, but our investments won’t be as valuable.
Question: Clearly, we’ll need to hunker down to survive this ongoing bear market. Is there any good news? A silver lining?
Glenn Neely:With proper investment and with investment timing, you can protect a great deal of your capital during this period. A lot of my customers either benefited from or avoided loss during the 2008-2009 bear market, because they were properly hedged or they were out of the market.
Just because things are bad or the stock market has dropped doesn’t mean you have to do poorly in the market. There are strategies to protect yourself, especially if you know these events in advance. The most positive advice I can share is to have strategies in place to take advantage of market action and avoid bad market conditions to preserve your capital.
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