Dow 1,000? Oh my.

In a recent online New York Times article, Jeff Sommer interviews Robert Prechter, a stock market forecaster, who predicts…

“…we have entered a market decline of staggering proportions — perhaps the biggest of the last 300 years.”

What is this “staggering” market decline?

According to Mr. Prechter…

“The Dow, which now stands at 9,686.48, is likely to fall well below 1,000 over perhaps five or six years as a grand market cycle comes to an end, he said.”

Mr. Prechter uses a technical approach called the Elliot Wave Theory to make his predictions. The Elliot Wave International Website describes this technique as…

“a detailed description of how groups of people behave. It reveals that mass psychology swings from pessimism to optimism and back in a natural sequence, creating specific and measurable patterns.

One of the easiest places to see the Elliott Wave Principle at work is in the financial markets, where changing investor psychology is recorded in the form of price movements. If you can identify repeating patterns in prices, and figure out where we are in those repeating patterns today, you can predict where we are going.”

What does Mr. Prechter suggest we now officially freaked out investors do?

…individual investors should move completely out of the market and hold cash and cash equivalents, like Treasury bills, for years to come. (For traders with a fair amount of skill and willingness to embrace risk, he suggests other alternatives, like shorting the market or making bets on volatility.) But ultimately, “the decline will lead to one of the best investment opportunities ever.”

It’s hard to imagine the Dow losing 90% of it’s current value over the next 5 to 6 years. The Elliot Wave Theory, even though based on past market sentiment, is still primarily based on psychology—not exactly hard science.

Considering how fickle we humans can be, this will be one to watch. But, if it does happen, you heard it from me…second.

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