Gold: Best Supporting Role In Economic Downturns? Think Again

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What Can Movies Tell You About the Stock Market?

March 15, 2010

By Editorial Staff

The following article is adapted from a special report on “Popular Culture and the Stock Market” published by Robert Prechter, founder and CEO of the technical analysis and research firm Elliott Wave International. Although originally published in 1985, “Popular Culture and the Stock Market” is so timeless and relevant that USA Today covered its insights in a recent Nov. 2009 article. For the rest of this revealing 50-page report, download it for free here.

This year’s Academy Awards gave us movies about war (The Hurt Locker), football (The Blind Side), country music (Crazy Heart) and going native (Avatar), but nowhere did we see a horror movie nominated. In fact, it looks like Sweeney Todd, The Demon Barber of Fleet Street was the most recent to be nominated in 2008, for art direction (which it won), costume design and best actor, although the last one to win major awards for Best Picture, Director, Actor and Actress was The Silence of the Lambs in 1991.

Whether horror films win Academy Awards or not, they tell an interesting story about mass psychology. Research here at Elliott Wave International shows that horror films proliferate during bear markets, whereas upbeat, sweet-natured Disney movies show up during bull markets. Since the Dow has been in a bear-market rally for a year, now is not the time for horror films to dominate the movie theaters. But their time will come again.

In the meantime, to catch up on why all kinds of pop culture — including fashion, art, movies and music — can help to explain the markets, take a few minutes to read a piece called Popular Culture and the Stock Market, which Bob Prechter wrote in 1985. Here’s an excerpt about horror movies as a sample.

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From Popular Culture and the Stock Market by Bob Prechter

While musicals, adventures, and comedies weave into the pattern, one particularly clear example of correlation with the stock market is provided by horror movies. Horror movies descended upon the American scene in 1930-1933, the years the Dow Jones Industrials collapsed. Five classic horror films were all produced in less than three short years. Frankenstein and Dracula premiered in 1931, in the middle of the great bear market. Dr. Jekyll and Mr. Hyde played in 1932, the bear market bottom year and the only year that a horror film actor was ever granted an Oscar. The Mummy and King Kong hit the screen in 1933, on the double bottom. These are the classic horror films of all time, along with the new breed in the 1970s, and they all sold big. The message appeared to be that people had an inhuman, horrible side to them. Just to prove the vision correct, Hitler was placed in power in 1933 (an expression of the darkest public mood in decades) and fulfilled it. For thirteen years, lasting only slightly past the stock market bottom of 1942, films continued to feature Frankenstein monsters, vampires, werewolves and undead mummies. Ironically, Hollywood tried to introduce a new monster in 1935 during a bull market, but Werewolf of London was a flop. When film makers tried again in 1941, in the depths of a bear market, The Wolf Man was a smash hit.

Shortly after the bull market in stocks resumed in 1942, films abandoned dark, foreboding horror in the most sure-fire way: by laughing at it. When Abbott and Costello met Frankenstein, horror had no power. That decade treated moviegoers to patriotic war films and love themes. The 1950s gave us sci-fi adventures in a celebration of man’s abilities; all the while, the bull market in stocks raged on. The early 1960s introduced exciting James Bond adventures and happy musicals. The milder horror styles of the bull market years and the limited extent of their popularity stand in stark contrast to those of the bear market years.

Then a change hit. Just about the time the stock market was peaking, film makers became introspective, doubting and cynical. How far the change in cinematic mood had carried didn’t become fully clear until 1969-1970, when Night of the Living Dead and The Texas Chainsaw Massacre debuted. Just look at the chart of the Dow [not shown], and you’ll see the crash in mood that inspired those movies. The trend was set for the 1970s, as slice-and-dice horror hit the screen. There also appeared a rash of re-makes of the old Dracula and Frankenstein stories, but as a dominant theme, Frankenstein couldn’t cut it; we weren’t afraid of him any more.

Hollywood had to horrify us to satisfy us, and it did. The bloody slasher-on-the-loose movies were shocking versions of the ’30s’ monster shows, while the equally gory zombie films had a modern twist. In the 1930s, Dracula was a fitting allegory for the perceived fear of the day, that the aristocrat was sucking the blood of the common people. In the 1970s, horror was perpetrated by a group eating people alive, not an individual monster. An army of dead-but-moving flesh-eating zombies devouring every living person in sight was a fitting allegory for the new horror of the day, voracious government and the welfare state, and the pressures that most people felt as a result. The nature of late ’70s’ warfare ultimately reflected the mass-devouring visions, with the destruction of internal populations in Cambodia and China.

Learn what’s really behind trends in the stock market, music, fashion, movies and more… Read Robert Prechter’s Full 50-page Report, “Popular Culture and the Stock Market,” FREE

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Learn Elliott Wave Analysis — Free

Often, basics is all you need to know.
March 5, 2010

By Editorial Staff

Understand the basics of the subject matter, break it down to its smallest parts — and you’ve laid a good foundation for proper application of… well, anything, really. That’s what we had in mind when we put together our free 10-lesson online Basic Elliott Wave Tutorial, based largely on Robert Prechter’s classic “Elliott Wave Principle — Key to Market Behavior.” Here’s an excerpt:

Successful market timing depends upon learning the patterns of crowd behavior. By anticipating the crowd, you can avoid becoming a part of it. …the Wave Principle is not primarily a forecasting tool; it is a detailed description of how markets behave. In markets, progress ultimately takes the form of five waves of a specific structure.

The personality of each wave in the Elliott sequence is an integral part of the reflection of the mass psychology it embodies. The progression of mass emotions from pessimism to optimism and back again tends to follow a similar path each time around, producing similar circumstances at corresponding points in the wave structure.

These properties not only forewarn the analyst about what to expect in the next sequence but at times can help determine one’s present location in the progression of waves, when for other reasons the count is unclear or open to differing interpretations.

As waves are in the process of unfolding, there are times when several different wave counts are perfectly admissible under all known Elliott rules. It is at these junctures that knowledge of wave personality can be invaluable. If the analyst recognizes the character of a single wave, he can often correctly interpret the complexities of the larger pattern.

The following discussions relate to an underlying bull market… These observations apply in reverse when the actionary waves are downward and the reactionary waves are upward.

1) First waves — …about half of first waves are part of the “basing” process and thus tend to be heavily corrected by wave two. In contrast to the bear market rallies within the previous decline, however, this first wave rise is technically more constructive, often displaying a subtle increase in volume and breadth. Plenty of short selling is in evidence as the majority has finally become convinced that the overall trend is down. Investors have finally gotten “one more rally to sell on,” and they take advantage of it. The other half of first waves rise from either large bases formed by the previous correction, as in 1949, from downside failures, as in 1962, or from extreme compression, as in both 1962 and 1974. From such beginnings, first waves are dynamic and only moderately retraced. …

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What Does NOT Move Markets? Examining 8 Claims of Market Efficiency

By Susan Walker

If everyone says that shocks from outside the financial system — so-called exogenous shocks — can affect it for better or worse, they must be right.

It just sounds so darned logical, right? Economists believe this trope to be true, mainly because they believe that investors are rational thinkers who re-evaluate their positions after every new bit of relevant information turns up.

Beginning to sound slightly impossible? Well, yes.

It turns out that logic is exactly what’s missing from this it-feels-so-right idea of rational reaction to exogenous shocks. Read an excerpt from Robert Prechter’s February 2010 Elliott Wave Theorist to see how Prechter deals with this widely held belief.

Find out what really moves markets — download the free 118-page Independent Investor eBook. The Independent Investor eBook shows you exactly what moves markets and what doesn’t. You might be surprised to discover it’s not the Fed or “surprise” news events. Learn more, and download your free ebook here.

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Excerpted from Prechter’s February 2010 Elliott Wave Theorist, published Feb. 19, 2010

The Efficient Market Hypothesis (EMH) argues that as new information enters the marketplace, investors revalue stocks accordingly. … In such a world, the market would fluctuate narrowly around equilibrium as minor bits of news about individual companies mostly canceled each other out. Then important events, which would affect the valuation of the market as a whole, would serve as “shocks” causing investors to adjust prices to a new level, reflecting that new information. One would see these reactions in real time, and investigators of market history would face no difficulties in identifying precisely what new information caused the change in prices. …

This is a simple idea and simple to test. But almost no one ever bothers to test it. According to the mindset of conventional economists, no one needs to test it; it just feels right; it must be right. It’s the only model anyone can think of. But socionomists [those who use the Wave Principle to make social predictions] have tested this idea multiple ways. And the result is not pretty for the theories that rely upon it.

The tests that we will examine are not rigorous or statistical. Our time and resources are limited. But in refuting a theory, extreme rigor is unnecessary. If someone says, “All leaves are green,” all one need do is show him a red one to refute the claim. I hope when we are done with our brief survey, you will see that the ubiquitous claim we challenge is more akin to economists saying “All leaves are made of iron.” We will be unable to find a single example from nature that fits.

* * *

In his February 2010 Elliott Wave Theorist, Prechter then goes on to show charts that examine each of these claims that encompass both economic and political events:

Claim #1: “Interest rates drive stock prices.”
Claim #2: “Rising oil prices are bearish for stocks.”
Claim #3: “An expanding trade deficit is bad for a nation’s economy and therefore bearish for stock prices.”
Claim #4: “Earnings drive stock prices.”
Claim #5: “GDP drives stock prices.”
Claim #6: “Wars are bullish/bearish for stock prices.”
Claim #7: “Peace is bullish for stocks.”
Claim #8: “Terrorist attacks would cause the stock market to drop.”

To protect your personal finances, it’s important to think independently from the crowd, particularly when the crowd buys into what economists say.

Find out what really moves markets — download the free 118-page Independent Investor eBook. The Independent Investor eBook shows you exactly what moves markets and what doesn’t. You might be surprised to discover it’s not the Fed or “surprise” news events. Learn more, and download your free ebook here.

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Use Bar Chart Patterns To Spot Trade Setups

How a 3-in-1 chart formation in cotton foresaw the January selloff
February 26, 2010

By Nico Isaac

For Elliott Wave International’s chief commodity analyst Jeffrey Kennedy, the single most important thing for a trader to have is STYLE– and no, we’re not talking business casual versus sporty chic. Trading “style,” as in any of the following: top/bottom picker, strictly technical, cyclical, or pattern watcher.

Jeffrey himself is, and always has been, a “trend” trader; meaning: he uses the Wave Principle as his primary tool, along with a few secondary means of select technical studies. Such as: Bar Patterns. And, of all of those, Jeffrey counts one bar pattern in particular as his absolute, all-time favorite: the 3-in-1.

Here’s the gist: The 3-in-1 bar pattern occurs when the price range of the fourth bar (named, the “set-up” bar) engulfs the highs and lows of the preceding three bars. When prices move above the high or below the low of the set-up bar, it often signals the resumption of the larger trend. The point where this breach occurs is called the “trigger bar.” On this, the following diagram offers a clear illustration:

For a real-world example of the 3-1 formation in the recent history of a major commodity market, take a look at this close-up of Cotton from Jeffrey Kennedy’s February 5, 2010, Daily Futures Junctures.

As you can see, a classic 3-in-1 bar pattern emerged in Cotton at the very start of the new year. Then, within days of January, the trigger bar closed below the low of the set-up bar, signaling the market’s return to the downside. Immediately after, cotton prices plunged in a powerful selloff to four-month lows.

Then February arrived and with it, the end of cotton’s decline. In the same chart, you can see how Jeffrey used the Wave Principle to calculate a potential downside target for the market at 66.33. This area marked the point where Wave (5) equaled wave (1), a common relationship. Since then, a winning streak in cotton has carried prices to new contract highs.

What this example tells you is that by tag-teaming the Wave Principle with Bar Patterns, you can have a higher objective chance of pinning the volatile markets to the ground.

To learn more, read Jeffrey Kennedy’s exclusive, free 15-page report titled “How To Use Bar Patterns To Spot Trade Set-ups,” where he shows you 6 bar patterns, his personal favorites.

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11 Commonplace Market Views: True or Myth?

By Susan C. Walker

“Cash on the sidelines is bullish for stocks.” Have you ever heard some stock market pundit utter these words? Have you ever wondered if the statement were true? Read this item from the latest issue of The Elliott Wave Financial Forecast, and you’ll wonder no more:

Myth — Cash on the sidelines is bullish for stocks. This refrain rang like a gong all the way through the declines of 2000-2002 and 2007-2009. In February 2000, when mutual fund cash hit 4.2% (compared to 3.8% in November), The Elliott Wave Financial Forecast issued its “cash is king” advice. Once again, the word on the street is that there is way too much “cash on the sidelines” for stocks to fall precipitously. This chart shows net cash available to investors plotted beneath the DJIA. In December 2007, available net cash expanded to a new high, besting all extremes since at least 1992, a 15-year time span. Despite the presence of this mountain of cash, the DJIA lost more than half its entire value over the next 15 months. Indeed, as the chart shows, cash remained high right as the stock market entered the most intense part of the crash in 2008. Available cash does correlate with the market’s moves, but the market is in charge, not the cash.
--The Elliott Wave Financial Forecast, Jan. 29, 2010

Now take a look at these 10 statements and decide if they are true:

1. Earnings drive stock prices.
2. Small stocks are the place to be.
3. Worry about inflation rather than deflation.
4. It’s enough to simply beat the market.
5. To do well investing, you have to diversify.
6. The FDIC can protect depositors.
7. It’s bullish when the market ignores bad news.
8. Bubbles can unwind slowly.
9. People can make money speculating.
10. News and events drive the markets.

Bob Prechter and our other analysts have debunked each of these statements as a market myth. You can discover how we exposed these ideas as myths, and in turn make more informed decisions about your investing.

We’ve gathered the writings that expose these 10 statements as market myths in our 33-page eBook, called Market Myths Exposed. They come from two of our premier publications, The Elliott Wave Theorist and The Elliott Wave Financial Forecast, as well as two of our books, Prechter’s Perspective and The Wave Principle of Human Social Behavior.

Get Market Myths Exposed for FREE
The 33-page eBook takes the 10 most dangerous investment myths head on and exposes the truth about each in a way every investor can understand. You will uncover important myths about diversifying your portfolio, the safety of your bank deposits, earnings reports, investment bubbles, inflation and deflation, small stocks, speculation, and more! Protect your financial future and change the way you view your investments forever! Learn more, and get your free eBook here.

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New Year: New Economic Boom? Why 2010 Should Be One to Remember

Elliott Wave International’s latest free report puts 2010 into perspective like no other. The Most Important Investment Report You’ll Read in 2010 is a must-read for all independent-minded investors. The 13-page report is available for free download now. Learn more here.

By Nico Isaac

In the realm of market psychology, there’s a big difference between optimism and extreme optimism. The first is seeing the glass half full. The second is seeing the glass half full deep in the heart of a bone-dry desert. In finance, it’s what we call “Buying the Dip” mentality — when all outcomes, even losses, are cause for celebration.

We are there now.

To wit: With a new year upon us, the mainstream has already come up with a fresh tagline to define the next 360-or so days. It even rhymes: The Bull Runs Again In 2010. This projection is in no way “in spite of” the fact that the U.S. stock market just finished its first decade of negative returns since the Great Depression; it’s because of that fact.
See, according to the mainstream experts, this “Lost Decade” of abysmal stock performance (in which the Dow ended 9% in the red, the S&P 500 – 24%, and the NASDAQ Composite – 44%) is the very foundation on which a new bull market will apparently be born. One economic scholar recently coined the phenomenon the “Slingshot Effect” — the more severe the downturn, the faster the recovery. (Associated Press)

Adding to the upbeat chorus are these recent news items:

“The horrible decade has wiped out all the excesses of the previous two decades and put us back on track for more normal returns.” (USA Today) — AND — “It may be the best of all possible worlds.” (Business News)

Back in the late 1990s, when the “unstoppable” NASDAQ began to experience regular days of double-digit drops, it was “Buy-the-Dip.” Now, it’s “buy the entire lost decade.” And, as the Dec.31, 2009 Elliott Wave Financial Forecast Short Term Update reveals — current sentiment readings “continue to show that stock market bears have packed up and moved to Florida for the winter.”

The Dec. 31 Short Term Update also reveals two mind-blowing charts of the S&P 500 versus Investor Intelligence Advisors Survey Percentage of Bears — AND, the S&P 500 versus the percentage of “Fully Committed” bullish advisors since 2000. The current reading is the lowest bearish percentage in 22 years.

Take one look at the evidence, and you’ll see that a defining pattern emerges: Low levels of bearishness have consistently coincided with one kind of market move. Combine this picture with the other measures of investor sentiment like momentum, volume and Elliott wave structure, and the evidence tilts overwhelmingly in favor of an unforgettable year.

Elliott Wave International’s latest free report puts 2010 into perspective like no other. The Most Important Investment Report You’ll Read in 2010 is a must-read for all independent-minded investors. The 13-page report is available for free download now. Learn more here.

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