Thursday, September 2, 2010

Of Wind & Waves

The underlying premise of the "buy and hold" philosophy has always been the belief that, over time, the market trends upwards. Robert Prechter, of Elliott Wave International, says that may have been the case up until recently, but is no longer. At least not for the next few years.

The Elliott Wave theory is supported by a number of other theories. Just as personality research tends to support the idea there are four basic human personality types, the Elliott Wave is not the only theory where new products, ideas, and services gain acceptance in three phases. Think S-curve in product cycles, or audiences in change management.

Early adopters are first. These people are the least invested in older products or ideas. They are quick to adopt the new behaviour, product, or service. Then comes, what I call, the herd. After a certain critical mass develops, the herd - the largest segment of the three - begins to adopt the new change. This is the period of greatest change. Finally, the third group, the resistors, begin to convert, usually because of obsolescence in the old ways.

This same process can be detected in the way people move in and out of the stock market. The chart (click on it for a larger version) shows a recent example in the S&P 500 index. According to the Elliott Wave theory, the wave with the five segments indicates a downward trend to the market. The three segment ABC wave is counter to the market direction.

Is Mr. Prechter correct? If so, we are in the process of a correction of generational proportions. "It is an ill wind that blows no good", said John Heywood. Perhaps some of the confusion as to market direction we are currently experiencing is caused by a different wind - the wind of change. Need more information? Check out the website at .

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