At the Crest of the Tidal Wave

At the Crest of the Tidal Wave: A Forecast for the Great Bear Market, Year 2000 Edition, written by Robert Prechter, Jr., describes the end of the great bull market and the ensuing stock market and economic calamity. The book includes two major parts:

PART I: THE STOCK MARKET
PART II: OTHER AREAS

You may buy the book from the Elliott Wave International bookstore.

Review of At the Crest of the Tidal Wave: A Forecast for the Great Bear Market

I have often said that reading a price chart is similar to reading an X-ray and like an experienced radiologist, when you become skilled at interpreting price patterns, you will be able to spot trouble. In 501 pages, Bob Prechter analyzes long-term stock market price patterns and tells his readers of big trouble ahead. Prechter includes almost 300 charts to support his contention that a stock market crash and subsequent economic depression are imminent. I have selected five key charts from the book to help tell Prechter's story of the forthcoming market and economic collapse.

PART I: THE STOCK MARKET

In Chapter 2: Patterns and Their Implications, Prechter shows a chart of stock prices (Figure 2-3) from 1700 through 1995 in which you can see a 200 plus-year Grand Supercycle wave within a developing even longer Millennium wave. This chart is the graphical evidence for Prechter's premise that the stock market is headed for an epic fall.

To highlight the extreme price highs and lows in each wave, Prechter includes the upper and lower parallel boundaries of the trend channel for each wave. Note: Figure 5-1 in Chapter 5: Expectations for the Great Bear Market shows the same chart with detailed wave labels and additional discussion.

Describing the Millennium wave he states, "We can now draw a parallel line upward from the top of 1720 as shown in Figure 2-3. The outcome is very exciting, because the resulting line touches today's prices exactly. This precise meeting powerfully supports both the already overwhelming case that stocks are more expensive than at any time since 1720 and the conclusion that the advance from 1784 is terminating."

Prechter concludes Chapter 2 with, "The market is rapidly reaching a decisive point." And he adds, "Never before has an Elliott Wave practitioner been alive to anticipate the termination of a structure of this magnitude. It may not happen again for centuries." Thus, Prechter sets the stage for the remainder of the book in which he forcefully argues that a stock market crash and economic depression are imminent.

Chapter 5: Expectations for the Great Bear Market describes the degree, extent, pattern and duration of the next bear market. Figure 5-3 shows stock prices from 1920 through 1995. Prices are plotted on the arithmetic scale from 0 to over 4,500 so the five-fold rise from early 1980 through 1995 is striking as the price rise looks almost parabolic. The same chart through 2007 would be even more dramatic. Prechter uses this chart to show support levels at the 1929 peak and the 1933 low.

Prechter discusses the possibility that stocks may not peak in 1995 because the Grand Supercycle lacks an extended wave of continuing upside prices. Figure 5-6 shows a hypothetical plot of a five wave Supercycle extension that would carry prices to new highs in an unspecified period. We now know that this extension is happening.

Later in Chapter 5, Prechter shows us a scenario of stock prices from 1995 through 2092 (Figure 5-12) and the pattern is not pretty. Prechter says the Dow could fall to the 90-390 range in a few years. If prices fell that quickly and steeply, they could touch the lower boundary of the Millennium wave trend channel.

Chapter 6 though 8 presents Prechter's analysis of the price patterns for transportation and utility indexes, S&P and NASDAQ indexes, secondary stocks and global price patterns, all of which confirm a stock mania.

Chapter 9: Momentum Considerations and Chapter 10: Investor Psychology: Valuation nicely set up the next chapter.

In Chapter 11: Manifestations of Investor Psychology, Prechter discusses in detail the unbridled optimism surrounding the stock market and admonishes us, "If you have the courage to separate yourself from the herd because you suspect it might be stampeding over a cliff, the time to do it is before the herd reaches the cliff." Investors, who were buying Internet stocks at ridiculously high prices, were warned.

Prechter concludes PART I in Chapter 12: The Role of Fundamentals saying, "Our only method of anticipating change is to discern the implications of the price patterns of markets, which reflect the patterns of social mood."

PART II: OTHER AREAS

After describing his scenario of the stock market crash and depression in the first part of the book, Prechter discusses the general economy, the monetary outlook (money supply, inflation, deflation, debt level and other monetary indicators) and asset classes including high grade bonds, gold, commodities, collectibles and real estate.

Chapter 21: How to Handle the Coming Environment, the last chapter, summarizes what you should and should not do to prepare for the stock market crash. Be sure to read the Social Implications section, a litany of social, economic and political events, some of which are quite chilling, that will reshape our country and the world.

When Will the Party End?

Prechter has laid out a well documented and convincing case for a stock market crash followed by a colossal economic depression. And his Elliott Wave analysis is compelling. But it is going on 12 years since the book was first published in 1995 and an epic crash and its attendant depression have not occurred and they do not seem imminent.

So was Prechter just plain wrong? Or is he simply years early in predicting the collapse of stocks and the economy? If you had heeded his advice in 1995 to liquidate your stock portfolio, you would have missed out on five very profitable years for many investors as prices rose to a peak in 2000. And if you had sold your real estate holdings, you would have missed out on many more years of price appreciation.

But if you had taken Prechter's advice, you might have escaped trying to flip real estate near the top of the housing market in 2006. Or you would have not poured money into Internet, technology and telecommunications stocks in the late nineteen nineties frenzy just before the bubble burst in 2000. In Chapter 11: Manifestations of Investor Psychology, Prechter says, "...turning bearish too early is actually not the biggest mistake you can make. The biggest mistake you can make is to turn bullish near the top."

So with such a mixed track record should we continue to listen to Prechter and read his books? My answer is yes. And here is why. Unless you are an eternal optimist, you will probably agree that the "good times" can not last forever. Using the Elliott Wave Principle, Prechter teaches us that "bad times" will occur and to expect them. And if we are properly prepared, we can profit during the worst of times. For me this is the book's most important message. We may not know when the bad times will occur, but we know that they will. So be prepared.

Hope for the Best But Plan for the Worst

In Chapter 21: How to Handle the Coming Environment Prechter tells us, "If this book has any advice; it is simply to arrange for some insurance." Taking his advice I compiled a list of money management and investment measures that I plan to implement: keep debt at or near zero, accumulate a substantial cash reserve in safe banks in Treasury-only money market funds, buy short-term Treasury bills directly from the U.S. government, own two exchange-traded funds that own gold bullion, own high-quality dividend-paying stocks and own long-term put options.

Three more important defensive money management measures include: Limit your stock holdings to an amount that you could afford to lose if they went to zero dollar value. Pay down your mortgage quickly by making extra payments. Finally do not own much, if any, of your employer's stock. You do not want the possibility of losing your job and your nest egg too.

Every person would be wise to draw up a defensive money management and investing plan and stick to it.

Add At the Crest of the Tidal Wave to Your Investing Library

At the Crest of the Tidal Wave is an important book for all serious-minded investors. I will use it as a reference book to remind me that markets do not go up forever.

To purchase it and other Elliott Wave based books please visit the Elliott Wave International bookstore.

Read Elliott Wave Principle by A. J. Frost and Robert Prechter, Jr. to become more familiar with Elliott Wave fundamentals and applications. Conquer the Crash, by Robert Prechter, Jr. and published in 2002, tells us how to survive a stock market crash and depression. It is a good companion to At the Crest of the Tidal Wave.

Also, be sure to view History's Hidden Engine, a free entertaining and informative video all about the Elliott Wave Principle and much more.

Reviewed by Richard Howard.

Updated October 24, 2007.