Robert Prechter: A 6-year decline?

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by Robert Prechter, editor The Elliott Wave Theorist

Our bearish outlook is extreme beyond all investors' present imagining. We foresee downward adjustments in stock market valuations by 60%, corporate worth by 80% and the dollar-based credit supply by 80% -- all at the same time.

The value of the Dow in terms of real money has plummeted persistently for an entire decade, yet the greatest expansion of credit (denominated in dollars) in the history of the world has kept the nominal price of the Dow elevated.

The great V-shaped bull market in the Dow lasted from 1974 to 2000, a period of 26 years. From 2000 to the present has been a frustrating time.

Fibonacci time relationships suggest that the biggest stock market top formation of all time is ending in 2010 and that a price collapse will last six years, until 2016.

Even though a 'silent crash' has devastated real stock prices, the falling value of the monetary unit due to credit creation brought the Dow to a new nominal high in 2007, and it is once again in five-digit territory. This period of levitation has last for 10 years.

The only way for the developing configuration to satisfy a perfect set of Fibonacci time relationships is for the stock market to fall over the next six years, and bottom in 2016.

If the stock market bottoms in 2016, its time relationships will look much like those of the entire bull market from 1932 to 2000.

It is convenient that the top of April 26, 2010 satisfies the 34-month time count from the July 2007 high. An equally good matrix would form with a top 21 months from now, in January 2012. This is the time that the 7.25 year and 20-year cycles top out.

The massive stock market top is preparation for something big. To understand why a major collapse in stock prices lies ahead, we need to begin with the long-term perspective.

Because financial bubbles have always resolved with an immediate collapse, the deepest drop should probably occur in the first wave of the correction.

Stock market bulls and most economists think that a new bull market and economic recovery are underway. Most bears are looking for either a long sideways bear market al la 1966-1982 or a hyperinflationary run to infinity.

Our Elliott wave outlook opposes both of these scenarios. The Grand Supercycle wave, an advance lasting more than two centuries, has ended.  In our view, the most likely profile is a stock market crash of historic proportions.

Declnes following manias always carry below the starting point of the mania. The crashes frollowing the Tulip Mania of the 1630s, the South Sea Bubble of the early 1700s and the Roaring Twenties bull market all brought prices to below the level of the bull markets' starting points.

In this case, the mania-style bull market started in 1974 at Dow 572.

The greatest extreme in positive social mood in centuries has led to the greatest expansion of credit in history. The level of outstanding debt is unsustainable and will be unservicable and unpayable in the deepeest depression in 300 years.

The trend toward negative social mood that has been in progress since 2000 and which is about to accelerate will continue to curtail lending and lead to a tidal wave of defaults and deflation.

Each of the three manias cited above were created by credit and leverage and each led to deflation. The amount of outstanding credit today is so large that system-wide defaults could lead to as much as an 80% to 09% decline in the volume of dollar-denominated credits worldwide.

The downward adjustments we forecast oould produce an overall stock price decline of 98% to 99%. I consider a forecast of a 92% decline or more -- calling for a triple digit Dow -- to be conservative.

Learn more about this financial newsletter at Robert Prechter's The Elliott Wave Theorist.