The prophet of the waves

By Vox Day

Do you ever wonder what it might feel like to speak with Galen or Galileo? The thought crept into my mind as I interviewed Bob Prechter, the founding father of socionomics, while the bulls were being noisily slaughtered on Wall Street last Thursday. Prechter is the first to insist that his imprecise art of reading market entrails for clues about society is not yet a science, but he nevertheless speaks with the impatient assurance of one who sees clearly that which others do not even sense.

No historian would think to deny that there are patterns to markets and societies. But are the patterns at all predictable? Aye, there’s the rub. For the full text of this interview and a brief explanation of some of the concepts discussed, please visit Vox Popoli.

Question: The Nasdaq-100 fell 83 percent in the Wave 1 bear. It has dropped 19.5 percent since the end of the Wave 2 bull in January. How far do you expect the Wave 3 bear we’re in now to extend downward?

Answer: Sometimes first waves can be extended. That may be the case here. Wave 3 will never be the shortest, so you’re certainly talking somewhere in the 60 percent range minimum, assuming a mild third wave. Otherwise, 80 percent is possible.

Q: The Dow has held up pretty well compared to the SPX and the NDX. Do you expect that to continue?

A: No, definitely not. The blue chips usually give way last in a bear market. A classic example is the first half of the 1970s. The overall decline started in 1966 but the blue chips held up and even made a new high in January 1973. Then, in two short years, they dropped 45 percent. The Dow Industrials will eventually catch up to the S&P 500, but not the Nasdaq. The Nasdaq is in a class by itself.

Q: What are the implications for the housing market? It seems to have shaken off Wave 1 rather nicely.

A: Yes, and that’s also typical. Pete Kendall studied the coincidence of real estate and stock market tops going back 200 years and found that there tended to be a lag, typically about two years between the two peaks. This lag has now been four years, which fits our thesis that the top is of larger degree than anything we’ve seen in the past 200 years. What we’re seeing is how people give up on one [investment class] and say the other will save us.

Q: Some people believe that diversifying into foreign markets will protect them. Do you think that’s a viable strategy?

A: No. It’s a very bad idea. One of the things I discussed in “Conquer the Crash” is what a burden foreign diversification can be when it’s time to get out of your positions. All equity markets will suffer, but North America and Europe will get hit most severely.

Q: What do you think of bear funds such as RYVNX and BEARX? They did pretty well from 2000 to 2002. Would you expect them to do well in 2005 and 2006?

A: Definitely. I think for the average investor, those are excellent ways to make money in the bear market. You avoid the time decay of options as well as the open-ended risk of being short an individual stock.

Q: Mainstream commentators often mention the election cycle as a means of assuring that the markets will go up. That hasn’t played out too well this year – do you expect a significant move upward into November?

A: Quite the opposite. I’m looking for a down into the election, probably a downward acceleration into the election.

Q: What are some of the more unexpected socionomics trends that you expect to reveal themselves as Wave 3 plays out?

A: A lot of them have already begun. We told people several years ago that there would be religious conflicts and foreign attacks on U.S. soil in “At the Crest of the Tidal Wave.” That’s old news now, but it wasn’t then. As for things that haven’t happened yet, two things I expect to see are secession movements and labor strikes.

Q: How are you attempting to improve the art-science of assigning wavecounts and making socionomic predictions?

A: The biggest step toward increasing our accuracy is the work I did for “Beautiful Pictures.” Even in “The Elliott Wave Principle,” chapter 4, we steered people in the right direction, but here I think I’ve demonstrated it.