The State of Global Markets 2013

Global
Markets
The State
of thej i
2013 EDITION

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The State of the Global Markets – 2013 Edition
Welcome. . . . . . . . . . . . 3
The World. . . . . . . . . . . 4
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
.Special Section: Gold & Silver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
.Special Section: A Rise in Oil Production. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Special Section: The Global Warming Panic is a Distant Memory. . . . . . . . . . . . . . . . . . 8
United States. . . . . . . 10
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
The Stock Market. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Cultural Trends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
.Special Section: Major Top in the Bond Market. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Special Section: The Government Grabs the Bag with Both Hands. . . . . . . . . . . . . . . . 22
Europe. . . . . . . . . . . . 24
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
The Stock Market. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Cultural Trends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
.Special Section: The International Bank Heists Begin. . . . . . . . . . . . . . . . . . . . . . . . . . . 28
.Special Section: Transportation Losing Traction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
.Special Section: Swapping Out Fear. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Asia-Pacific. . . . . . . . 33
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
.Korea: Up On Gangnam Style. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
.An Elliott Wave Perspective on China’s Stock Market . . . . . . . . . . . . . . . . . . . . . . . . . . 34
.The End of India’s Malaise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
.Australia: Resilience Down Under. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
.Special Section: Emerging Markets to Rally Further. . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
.Special Section: Social Conflicts Occurring at Market Lows . . . . . . . . . . . . . . . . . . . . . 39
CONTENTS

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WELCOME
Dear reader,
Welcome!
Thank you for downloading Elliott Wave International’s new report, The State of the Global Markets – 2013 Edition.
We put together this report to get you up to speed with EWI’s big-picture outlook for 2013 and give you a sneak peek
inside our regional monthly publications, The Elliott Wave Financial Forecast, The European Financial Forecast and
The Asian-Pacific Financial Forecast, as well as our flagship publication since 1979, Robert Prechter’s Elliott Wave
Theorist.
As you read, you may notice our analysis doesn’t mention President Barack Obama’s re-election, the fiscal cliff, Silvio
Berlusconi’s return as Italy’s premier and other news of geopolitical importance. That’s because we take the radical
view that external events like these have no significant long-term impact on the financial markets. Instead, we look at
the market’s internal price patterns and what really drives them: social mood.
Social mood is the common thread connecting everything we do at EWI. We believe that investors’ moods and their
resulting decisions to buy and sell are regulated by waves of optimism and pessimism that fluctuate according to the
Wave Principle.
Once you identify the current stage of social mood and put it into the context with the Wave Principle of human social
behavior, you can begin to formulate forecasts not only for financial markets; but also for the economy, political voting
preferences, war and peace, and even social trends in music, filmmaking, fashion and beyond.
Our sincere hope is that this report challenges your thinking about investing and encourages you to dig deeper into
the Wave Principle in 2013.
Thank you for reading,
— The EWI Team

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2013 Edition
OVERVIEW
Excerpted from the March 2013 Elliott Wave Financial
Forecast
The global economy is adhering nicely to the blueprint
EWFF laid out in January 2012:
The economy is clearly vulnerable to a debilitating wave
of deflation. The threat is approaching quickly from an
important source: Europe.
EWFF identified the downturn in Europe’s most
vulnerable economies—Greece, Spain, Portugal and
Italy—and stated that the contraction would spread
outward from these countries just as instability in 1929
spread outward from Germany, Europe’s weak spot
during the 1920s. The European contraction now afflicts
nearly the entire continent, and it’s gaining speed. This
chart of the year-over-year annual change in Eurozone
GDP displays a steady rate of descent, from minus
0.1% in the first quarter of 2012 to minus 0.9% in the
fourth quarter. By the end of last year, even Germany’s
economy, which is the supposed seat of European
stability, recorded minus 0.6% growth for the quarter (a
negative 2.3% annualized). The line across the highs on
the GDP chart shows a steady longer-term deterioration.
In fact, peak GDP growth in Europe occurred in 1995,
four years before the launch of the euro in 1999. There
is no sign of respite, either. In January, Eurozone
unemployment hit a record high of 11.9%. Spain and
Greece led the way with increases to 26.2% and 27%,
respectively. Even the EU Commission concedes that
Europe will continue to contract throughout 2013.
In our case for global deflation, the January 2012 EWFF
referred to the book The European Economy 1914-2000
by historian Derek Aldcroft. The author records that
1929 was marked by a “dramatic curtailment of lending,”
which “was sufficiently widespread to undermine the
fragile stability of the international economy.”The charts
on the next page show both EU loans and the total value
of bonds outstanding stalling out in 2008, when credit
growth peaked at 11.5%. In December 2012, outright
debt deflation arrived in Europe, as the rate of change
The World
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shown in the second chart dipped below zero for the first
time. In a classic sign of a spiraling deflation, record
low central bank lending rates are failing to generate
increased loan volumes, especially at companies with
“recession-battered balance sheets” where cheaper credit
is desperately needed. “Corporate borrowing in Italy is
off 3%” from 2012, while borrowing by companies in
Portugal is down 7%, Greece is down 9% and Spain’s is
off 11%. In time, companies all over the world will be
pulled into this spiral.
Another clear parallel to the end of the bull market in 1929
is a sudden, global drive toward currency devaluation.
Aldcroft described these manipulations, which gained
strength through the course of the 1929-1932 bear market:
The way out of the impasse was sought through
devaluation. The initial deflation was quickly transmitted
through the links forged by the fixed exchange rates of
the gold standard, but deflation could never be more than
a temporary expedient since to meet external obligations
would have required politically intolerable doses of
deflation. Consequently the easiest solution was to break
the links by abandoning the gold standard. This was done
by several Latin American countries, and Australia and
New Zealand late in 1929 and early in 1930.
Of course, the gold standard is long gone, but central
banks are still trying to manipulate their currencies. In a
bid to weaken the yen, Japan recently initiated a “huge
round of fiscal and monetary expansion.” As the yen fell,
one country after another followed with “competitive
depreciations” of their own. On February 8, “Venezuela
lobbed a nuke into a knife fight by devaluing its currency
by46%.”OnMonday,Chinajumpedonboard,announcing
that it is “‘Fully Prepared’for Currency War.”As in 1929,
deflation is “politically intolerable” and countries are
fighting back by attempting to debase their currencies. But
the strategy won’t work for the same reason that it failed
in 1929: devaluation steals all-important purchasing power
from the global economy. Here’s how Aldcroft explains
what happened in the early 1930s:
Industrialized countries in Europe felt the impact [of
devaluation] directly from America, and indirectly via
the periphery, as demand for industrial imports declined,
and in turn declining demand for raw materials and
foodstuffs on the part of the industrial powers fed back
to the periphery. Once started therefore the deflationary
process became cumulative.
The charts show that global deflation is underway once
again, and the cumulative effects are starting to appear
in the U.S.
Silver is down 42% since its April 25, 2011 peak, while
gold prices are down 19% from their top on September 6,
2011; both metals are moving in line with our forecast
from September 2011, within one week of gold’s peak at
$1921 an ounce.
The “fear” of hyper-inflation, which permeates bullish
gold forecasts, will, in our opinion, ultimately prove to
be badly misplaced. The evidence of a bullish extreme
from which gold is now reversing includes a Daily
Sentiment Index reading of 98% bulls (trade-futures.
com); a surge in SPDR Gold Exchange-Traded Fund
total assets, which, incredibly, pushed its value past that
of the SPDR SP 500 ETF; and a round of margin hikes
on gold futures contracts by the Chicago Mercantile
Exchange. The CME responded to intense speculation
surrounding gold’s price rise with two rounds of hikes that
raised margin requirements 49%. Readers will recall that
a similar series of margin increases in silver — an 84%
rise from April 26 to May 5 (2011) — coincided with the
end of the line for the junior metal’s surge. At the time,
EWFF noted that a similar series of margin boosts in 1980
accompanied silver’s all-time price high. Margin hikes
are not necessarily fatal to a rising trend, but when they
come in bunches, as they have in gold and silver in recent
weeks, they tend to congregate around major price peaks.
—The Elliott Wave Financial Forecast,
September 2011
The chart on the next page updates one we published
in December showing gold prices and the total known
gold holdings (in troy ounces) in exchange-traded funds.
Investors had been piling into exchange-traded gold
funds from the 2011 peak right through the end of 2012
in anticipation of a resumption of gold’s bull market
SPECIAL SECTION: GOLD SILVER
Excerpted from the March 2013 and September 2011 Elliott Wave Financial Forecast

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from 1999. Gold bulls actually cited this fund buying as
a primary reason why gold would rally to new all-time
highs. In contrast, we labeled the fund purchases as “bear
market buying.” This activity, in our view, was not a
determinant of gold prices but a manifestation of extreme
optimism and typical behavior during the first decline after
a major top. ETF gold holdings peaked in December and
have since contracted by their largest percentage in nearly
five years, since July-September 2008, as investors have
suddenly awakened to gold’s failure to advance, a special
surprise in the face of the Fed’s “QE Infinity” program.
As gold works lower over time, ETF holdings should
continue to shrink.
Near term, the metal’s persistent decline since October has
resulted in some short term measures of sentiment moving
to pessimistic extremes. A near term rally is therefore
possible, but we don’t think the bear market is over.
SPECIAL SECTION: A RISE IN OIL PRODUCTION
Excerpted from the November 2012 Elliott Wave Theorist
One bright spot in the news is that oil is becoming more plentiful. Since being reluctantly green-lighted by the Obama
Administration, drillers have found vast new oil fields in the Dakotas, where unemployment has fallen to less than 3%
due to the drilling boom. Current trends suggest that the U.S. will soon surpass Saudi Arabia as the world’s biggest
oil producer.
This development surprised a lot of people but not you. The July 25, 2006 issue of EWT offered financial and economic
reasons why the price of oil in the long run would not follow the path predicted in literally dozens of apocalyptic
books and hundreds of articles on so-called “Peak Oil.” Commentators from Ivy League professors to the New York
Times promoted the thesis that the world was running out of oil and had no energy alternative, thus portending an
energy shortage that would cripple the world. In the face of this onslaught, EWT presented this economic argument:
The Economic Factor
So far, we have discussed only the financial factor in the pricing of oil. The “Peak Oil” bulls never tire of listing
economic forces that will cause oil to go up for decades and centuries. Never mind that we did not hear about
this when oil was $10 a barrel; now it’s fashionable. But there is a far more fundamental aspect of economics
that the bulls are ignoring.
When a resource becomes scarce and expensive, do people bid it up to infinity and then revert to the Stone Age?
No. Why not? High prices provide incentives. Free markets always offer alternatives.
Let’s forget for the moment that there is in fact a debate about the extent of underground oil fields and that some
geologists believe they are much more extensive than most people think. Let’s forget the debates about whether
we can grow enough corn to propel automobiles.
What people demand is not gasoline, and not even cars, but transportation. A comprehensive train system run
on electric power provided by nuclear plants would work just fine. No fuel oil would be required. And pollution
would be nearly eliminated.

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The World
The only impediments to such
a solution are superstition and
politics. The free market could
build the whole system in 30
years if government would let
it, just as it built the stunningly
successful internet and cell
phone networks in just 20
years after the government
ended ATT’s communications
monopoly in 1984. Economic
forces are reliable, but political
ones are not. It is always
possible for government to make
energy production impossible,
as it nearly does already in
the United States with respect
to exploration, drilling and
refining. Had the free market
been allowed to operate, there
would be no crisis today.
Even though politics is the
only impediment to reasonably
priced transportation, the “Peak Oil” devotees
never talk about it. They cite natural resource
limits and economics. But natural resource
limits have never limited progress; they have
only directed it.
…So there are both short-term and long-term
forces, working slowly perhaps but relentlessly,
against an ever-rising oil price. It is not impossible
for the world to go dark or for people to revert
to the Stone Age, but it wouldn’t occur because
of economic forces on oil prices; it would occur
because of politics and war, the main immediate
forces of setback in human history.
—The Elliott Wave Theorist, July 2006
As it happened, the cited geologists were right, and the
simplest solution of all is coming into play: find more
oil.Alternatives from hydrogen fuel cells to a process of
turning coal into oil have also arisen, and, if government
allows, they too will contribute to the supply of energy.
The Elliott wave model is the best basis on which to
forecast commodity prices, but Economics 101 is useful
at the extremes, and this is a case in point. The economics
behind the “peak oil” thesis guaranteed its own failure.
The results of that fact are finally becoming visible.
Incredulous journalists are asking, “Who would have
thought…?”
To update the Elliott wave picture for oil: In June 2008,
a month from oil’s all-time high, EWT made a highly
contrarian peak price argument for oil based on its nearly
completed ten-year Elliott wave pattern and forecast that
“one of the greatest commodity tops of all time is due
very soon.” Oil subsequently crashed from $147.27 to
$32.40 in just five months in wave A of the bear market.
Three years later, EWT recognized the peak of wave B
in May 2011. So far that peak has held. There is a chance
that the rally isn’t over, but it’s slim. One reason is that
the rally into 2011 rekindled the peak-oil vision, which
prompted investors’hoarding of black gold in tankers all
around the world.When the owners of that oil see the price
fall further as more supply enters the pipelines, they will
give up and sell their inventories, which will depress the
price even further.
Fundamentals generally lag way behind financial trends.
In a bear market, fundamentals don’t become obvious
until wave C gets underway. The fact that economic
forces are now joining financial forces in the battle
against oil’s high price fits our Elliott wave analysis that
oil is already within wave C of a great A-B-C bear
market, as shown in EWT since May 2011 and updated
in the figure above.

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SPECIAL SECTION: THE GLOBAL WARMING PANIC IS A DISTANT MEMORY
Excerpted from the November 2012 Elliott Wave Theorist
Speaking of energy, a non-event that recently had the media buzzing was the dearth of discussion of the global warming
issue during the U.S. presidential debates, not to mention nearly everywhere else on earth over the past year. This
is another social change predicted in EWT in the face of vicious opposition. This excerpt highlights the key points:
Sometimes scientists herd as much
as investors do, and this study [by
NASA] appears to be a case of extreme
expression following a long-established
trend. I am not a climatologist, but I am
a student of manias and herding, and
that is what the global-warming craze
appears to be about.
My purpose here is not primarily to
make a case against man-made global
warming. My primary intent is to take
a look at the question from the point
of view of a social psychologist to
decide whether it appears to be the
result of hysteria. The points above
establish that there are two sides to the
global-warming question.Yet only one
has captured the public’s imagination
(and I choose that word consciously).
The global-warming scare is highly
reminiscent of the Alar scare, in which
Congress called upon the expertise of
movie stars; the ozone-depletion scare
and the acid-rain scare, which have all
but vanished; the claim that pesticides
were making frogs lame (it turned out to
be a virus); the rash of reports of devil
worshippers, who were never found;
the national child-care molestation
hysteria, which turned out to be almost
entirely contrived; the panic in Europe
over poison in Coca-Cola; and any
number of like manias. Hysteria often
signals the end of a trend.
There is powerful evidence of herding
at the social level on the global warming
issue. Commentary on the subject is
even selling theater tickets. And like
all past social trends that were ending,
there is a rush to extrapolate. The
temperature data from which modelers
at NASA derive their extrapolation
are scant, the projection is extreme
and their tone is strident. When any
writers, including scientists, extrapolate
29 years’ worth of temperature data
to predict an imminent apocalypse of
Biblical proportions in an environment
of waxing social focus, rising panic
and calls for government obstruction,
one must acknowledge the likelihood
of social-psychological forces behind
such a report and investigate whether
the data support the prediction.
The crowd fearing global warming
rejects as heretics professors and
scientists who challenge all these
methods and conclusions, whether they
be at MIT or Stanford. Such rejection is
akin to what happens near the end of a
financial mania, such as the peak of the
real estate mania two years ago, when
bears were dismissed as delusional.
GW advocates told me that doubting
man-made global warming is akin
to denying evolution, but the GW
movement has not a little taste of
old-time religion in its accompanying
admonition of humanity: Man is evil;
he is destroying the earth; he is “fouling
his own nest,” as one scientist on the
web says. Scientists are usually good
at their fields but not necessarily at
recognizing their own political, moral
and [philosophical] biases.
One thoughtful scientist took issue with
theterm,“hysteria.”Butthetermapplies
here to social activity, not the overt
behavior of any particular individual.
In 2005, when I was speaking about
real estate hysteria and warning people
against investing in property, people
sporting a rather bemused expression
would coolly respond, as if instructing
an alien who lacked understanding of
the way things worked on Earth, “They
are not making any more land” and
“it’s all about location.” They would
say this with utmost calm. They had
thought about it and sifted through the
evidence. They were not hysterical but
rational and thoughtful. At least, this
was the appearance of behavior at the
individual level.At the collective level,
something else was going on. The
number of people participating in the
real estate market was unprecedented,
and their borrowing, building and
bidding activities, collectively, were
extreme.Advocatesofman-madeglobal
warming may appear sober as judges
individually, but they are participating
in a mass movement, complete with
press releases, student rallies, pop
concerts, movie documentaries and an
underlying tone of moral crusade.
I think the current frenzy over the
subject is probably a symptom of
peaking cycles in both climatic
temperature and social psychology.
But unfortunately 70 years from now
most of us won’t be around to know
the answer. What I expect, based upon
observing mass movements, is that this
fear, too, will go away.
—The Elliott Wave Theorist,
June and July 2007
That was five years ago. Recently it has come to light—from globally
collected data reported by some of the very institutions that had passionately
promoted the case for man-made global warming in 2007—that the earth
in fact hasn’t warmed at all since 1997. One would think the case for
man-made global warming would be virtually closed from such contrary
evidence and that those who feared global warming would breathe a
happy sigh of relief and go home. Some of them have done just that. But
proponents remain vocal. This week a professor in a syndicated editorial
blamed the recent relative silence on the issue on “a profit-driven economic

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system that demands and necessitates endless growth,
a global U.S. military presence that helps facilitate it
and the ecologically rapacious consumption it entails.”
Whatever your opinion of these matters, all three of
them were in place during the entire period of waxing
panic over the global-warming issue, negating the claim
to their causing its opposite. He further charged, “In the
wake of extreme drought in much of the United States,
widespread wildfires in the western U.S., and now
Hurricane Sandy, Barack Obama’s and Mitt Romney’s
refusal to discuss human-induced climate change will
undoubtedly go down as political recklessness of historic
proportions.” If hurricanes, wildfires and droughts
were evidence of man-made climate change, man must
have secretly industrialized the world millions of years
ago. Archaeologists are pretty sure that didn’t happen.
The main thing likely to go down as being of historic
proportion is the extent of fear about global warming that
held sway in 2007. I doubt it will return in our lifetimes.
Further suggesting that the old trend is dead is that
government, always the last institution to join a herd, is
taking action. California passed a “cap-and-trade” law at
the height of the panic in 2006 and is now implementing
it. Naturally, it involves taxing people:
Under the plan, the California Air Resources Board
will auction off pollution permits on Wednesday called
“allowances” to more than 350 businesses, including
electric companies, food processors and refineries. The
board has estimated that businesses will pay a total of
$964 million for allowances in fiscal year 2012-2013.
(AP, 11/15)
Extorting a billion dollars annually from industry will
ultimately cause more pollution, as it did in communist
East Germany, where air became toxic and rivers caught
on fire. But California doesn’t yet shoot people trying to
leave, so the first likely trend here is that businesses will
accelerate their exodus out of the state. Unfortunately,
there may be more action at the federal level as well. At
a press conference on November 14, President Obama
declared, “I am a firm believer that climate change is
real, that it is impacted by human behavior and carbon
emissions. And as a consequence, I think we’ve got an
obligation to future generations to do something about
it.” (11/14, as reported by Reuters) Mayor of New York
Michael Bloomberg likes Obama’s position on this issue
so much that he endorsed the president for reelection. But
Obama’s waste of billions of taxpayer dollars propping
up so-called “clean energy” companies, along with
whatever new taxes and regulations the feds dream up,
will ultimately contribute to the trend toward national
poverty, which will increase pollution, not reduce it. With
any luck, the depression will distract various governments
from this destructive path. But, then again, destruction is
what depressions are about.

10
2013 Edition
OVERVIEW
Excerpted from the February 2013 Elliott Wave Financial
Forecast
Incredibly, the DJIA rallied back to 14,000, a move that
generated a cornucopia of ever-higher projections. The
wide array of optimistic extremes in sentiment measures
includes several readings that exceed the extremes of
2007, when the Dow made its all-time high. With a
finishing structure that ElliottWave Principle describes as
occurring at “the termination points of larger patterns,”
the market is ripe for a decline of historic magnitude.
THE STOCK MARKET
Excerpted from the February 2013 Elliott Wave Financial
Forecast
The sudden, loud chorus of market bulls, which has grown
to a full-blown crescendo, fits perfectly with the terminal
stages of a major advance. This chart shows the stunning
breadth of optimism extending to every class of investor.
The first indicator (second graph) on the chart shows the
percentage commitment to equities in the portfolios of
members in the NationalAssociation ofActive Investment
Managers (NAAIM).The latest reading reveals an all-time
high equity exposure of 104%, which means managers
are in a leveraged long position for the first time in the
seven-year history of the survey. The reading far surpasses
the 83% level which occurred at the October 2007 all-time
high in the Dow. A separate BofA Merrill Lynch survey
of 254 fund managers confirms that money managers’
“appetite for risk in their portfolio” is at its highest in
nine years.
The second indicator shows a major upswing in
bullishness among options traders via the Credit Suisse
Fear Barometer Index (the name is misleading since a
rising index means less fear). This index measures trader
sentiment by comparing the cost of three-month out-of-
the-money calls on the SP 500 relative to puts of the
same duration. The recent extreme of 33.32 on January
25 is the highest in the history of the indicator, which
United States
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United States
goes all the way back to November
1994. The CBOE Volatility Index
(VIX), which tracks the level of fear
and complacency using the premium
paid for at-the-money SP options,
declined to a low of 12.29 on January
18, its lowest reading—indicating
the most complacency—since April
2007, just prior to the major top in
the financials.
The third indicator shows a new
optimisticextremeamonginvestment
advisors. The 15-day average of Market Vane’s Bullish
Consensus rose to 68.2% on Thursday, its highest reading
since June 2007. The bottom graph plots the total assets
in the government money-market funds at Guggenheim
(formerly Rydex), showing that the public is likewise
complacent about the potential for a market decline.We’ve
inverted the totals to align them with the trend in stocks.
When people are highly confident that stock and bond
prices will continue to rise, they see little need to hold
money aside in money-market funds and instead load up
on financial assets. The total holdings in Guggenheim’s
money-market funds just dropped to their lowest level
ever, reflecting a supreme confidence by investors and a
full embrace of stocks and bonds.
At the opposite extreme, corporate insiders—investors
who are presumably privy to the future potential of their
companies—are dumping shares into the market at a
furious pace.According toVickersWeekly Insider Report,
among NYSE stocks there were 9.2 insider shares sold for
every share bought over the previous week. The last time
the ratio of sales-to-buys was higher was in July 2011,
just before the Dow declined 18% over the following four
months. As we’ve said previously, there may be many
reasons why an insider sells shares, but one of them is not
because they think their price is going higher.
Taken together, the breadth of extremes shown on the chart
indicates that stocks are not making a short-term top: these
measures are all greater than at any time since at least
2007, the year of the Dow’s all-time high. This is a rare
alignment that confirms this is an even more important,
and more bearish, juncture than 2007.
Rarefied Bullishness at a Grand Supercycle Peak
Obviously, the stock market is nowhere near the start of
a rally, as the Dow has been more or less advancing since
March 2009. But many observers’ comments have been
celebrating the latest new recovery highs as the beginning
of a new era. This is a remarkable and meaningful
development. Here are a few samples:
When asked about potential negatives such as high levels
of public and private debt and a deleveraging economy, a
CNBC buy-and-hold advocate said, “I just sort of ignore
it. Over the long term, the stock market is going to grow
7% a year. People say 14,000, is that the end of it? In 10
years, it’s going to be 30,000. In 20 years, it’s going to
be 50,000 or 60,000.” When publishers boldly asserted
a bullish future with books that proclaimed Dow 36,000,
40,000 and 100,000 in August 1999, EWFF called the
“mass fixation an odd combination of dangerous and
laughable.” It’s happening again on a slightly smaller
scale, but the willingness to proclaim a great new era after
13 years of sideways trading that contains two major bear
market legs is even more dangerous. As we explained in
2000, an overwhelming societal urge to proclaim a new
beginning after a long-running rise is among the most
bearish of sell signals.
As stocks ended the Grand Supercycle bull market in real
terms in early 2000, a sudden wave of bullish conversions
among long-time bears flashed a strong “top” signal. It’s
happening again, as many former bears are jumping on
the rise with both feet. According to the aforementioned
NAAIM survey (see chart, page 3), the current reading
of 104% includes a swing to 60% invested in equities
by managers who identify themselves as bears. Just
one week earlier, portfolios of this same cohort were at
-125%, which means they held leveraged short positions
equivalent to 125% of their portfolio. The “Explosion
of Greatness” comment shown in the above headlines is
from a hedge fund manager who claims he “has never
been bullish.” But now he says, “I am going to come out
of the closet…we are bullish” because “there is no major

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negative. There is no other choice out there.” Another
famous bear, “nicknamed ‘Dr. Doom’ for predicting
hard times ahead of the 2008 fiscal crisis,” issued an all
clear due to the Fed’s easy money policies, which will
continue “as far as the eye can see.” There were countless
fundamental “negatives” in the first quarter of 2009. Now,
say these optimists, there are none. Broadly speaking,
when everything looks negative, it’s a bottom. When there
are no major negatives, it’s a top.
The Great Capitulation
A related metamorphosis is the so-called “Great Rotation,”
the suddenly seemingly universal belief that low-yielding
government debt and extremely low returns on cash mean
that pension and insurance funds as well as the public
must pile back into equities, thereby driving stock prices
ever higher. Here, again, the belief is that the trend is just
starting. “If there is a great rotation going on from bonds
to stocks, we may be only in the top of the first inning,”
says a chief investment strategist. The strategist cites
the “TINA—or ‘there is no alternative’—factor.” TINA
is not an investment strategy; it’s a mental state, of the
kind that almost always results in losses in the domain of
investments. The current version will ultimately end in
ruin. This January 23 Reuters headline, along with 2,890
more Google News stories on the Great Rotation, reveals
the bullish sentiment behind it:
The Great Rotation:
A Flight to Equities in 2013
Belief in this idea is fueled by recently large equity mutual
fund inflows after many months of outflows. As this
chart of Investment Company Institute data shows, U.S.
equity funds flipped from a $30 billion net withdrawal in
December to a $30 billion net inflow in just the first three
weeks of January. The three-week total is higher than for
any full month since 2006.According to TrimTabs.com’s
figures for the full month of January, a record $77.4 billion
“flooded” into traditional stock and exchange-traded stock
funds. The total is $23.7 billion more than the previous
record, which was set in February 2000, one month after
the Dow’s Grand Supercycle stock peak. As USA Today
notes, “investors didn’t just put aside their aversion to
stocks in January: they tossed it out the window.”
After so many months of outflows, analysts say the sudden
inward rush “is hardly a sell indicator.” They think it will
continue for years. But the only comparable experience
argues otherwise. The topping process at the end of

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Cycle wave III is similar to the larger-degree
topping process that has transpired from 2000
to the present. It comprises three highs near
the 1000 level in 1966, 1968 and 1973. From
February 1972 to June 1973, equity mutual
funds experienced 17 straight months of net
outflows. In July 1973, after the final rise just
above 1000 had already ended in January of
that year, mutual fund flows popped to positive.
It occurred early in a decline that shaved 45%
off of the Dow’s value.
This chart of total mutual fund assets confirms
the potential for a quick return to record
outflows. The recent high does not include an
estimated new record of $64.8 billion in net
inflows for January, which brings total mutual
fund assets to almost $13 trillion. The clear
five-wave rise from 1984, however, strongly
suggests that the mutual fund business will be
shaken to its core in coming years. The Great
Rotation is really the Great Trap.
CULTURAL TRENDS
Workplace Revolution
Excerpted from the November and August 2012 Elliott Wave
Financial Forecast
According to USA Today, “at a time when much of the
nation is experiencing job cuts, belt-tightening and the
strains of a generally sour economy,” tech companies
shower employees with gourmet meals, free dry cleaning,
massages, hair cuts, shuttles and “snacks galore.”
Facebook leads the workplace makeover, replacing
cubicles with “shared work tables, couches, bars, cafes,
eateries and even pubs.” “Life’sA Beach forTech Hotbed,”
says another USA Today headline. Naturally, the latest
and greatest perk, “unlimited vacations,” is reserved for
the end. According to MSNBC, tech startups now allow
employees to take “all the vacation days they want.”
This “workplace revolution” may sound familiar. EWFF
charted the same progression at the conclusion of the bull
market in 2000. Many will remember it as beginning with
the arrival of “casual Fridays” in the late 1990s. The prior
revolution reached a climax in May 2000, when junior
analysts on Wall Street demanded and received “more
meal money, better laptop computers, casual dress codes
and access to the company gym on weekends.” The May
2000 issue of EWFF cited that victory as a sure sign
that conditions were “extremely ripe for a downturn.”
The NASDAQ was already crashing. In July 2000,
when workers started to demand “the ultimate perk: a
long breather from work,” EWFF noted one high-tech
executive’s complaints about a lack of sleep and stated,
“These managers should be careful. Workers are on
the verge of more free (literally) time than they ever
imagined possible.” The same psychological turn will
take place this time, too. In our view, this is the last
euphoric episode prior to a big Primary-degree stock
market decline, so the exhaustion that replaces it will be
new and improved.

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United States
The Slow Life Picks Up Speed
Excerpted from the October 2012 Elliott Wave Financial
Forecast
Deflation and the transition toward negative social mood
are separate phenomena, but the changing package-
delivery landscape is a perfect example of how mood
and monetary trend change work together at the largest
macroeconomic inflection points. Falling demand triggers
lower shipping costs, which are further weakened by a
sudden move away from a long-standing, bull market
preference for speed. The emerging slowdown is
confirmed by several Fed Ex analysts who insist it is not
simply a matter of reduced budgets. “There has been a
secular shift from ‘got to get it there overnight’ to more
deferred products,” says one. “You’re seeing a demand for
slow instead of a demand for fast,” says another.
High-speed trading is another arena in which the brakes
are suddenly slamming on. In September, several articles
suggested that foreign governments are way out front with
proposed or even adopted limits and that U.S. regulators
“have been slow to act.” One columnist called for a 100%
tax on profits from “‘investments’ that mature in 60
seconds.” By late September, however, the word was out
that U.S. regulators are getting on board the accelerating
drive to decelerate the rapidity of trading and establish
a new “Speed Limit for the
Stock Market.” Early this
week, an SEC panel approved
a “high-speed trading kill
switch.” According to the
latest accounts, even the
high-speed traders now
agree. “High-frequency
trading firms, long resistant
to tighter oversight of their
businesses, are beginning
to change their tune” (WSJ,
Oct. 1). As The Elliott Wave
Theorist pointed out in 2007,
“the need for speed” is a bull
market trait. The reference
was to highway speeds, but,
apparently, if the turn is big
enough, even traders, who
need speed to make money,
will get in line. Until very
recently, economists insisted
that the evidence favored the
high frequency traders and “a solid body of academic
research that shows they increase liquidity.” In the new
trend, risk aversion is king and the evidence will show
that the potential for catastrophic losses make it “just too
dangerous.”
Package delivery and stock trading are two industries
that have done nothing but go faster since the bull market
broke to definitive new highs in the early 1980s. Under
the psychology of a Grand Supercycle bear market,
however, a move in the opposite direction has gradually
gained traction. An early seed can be traced to 1989,
during the Primary wave 4 correction, when the “slow
food movement” emerged as a reaction to fast food. In
1999, the last year of the Grand Supercycle bull market,
it officially branched out with the establishment of the
World Institute of Slowness. By 2005, the book, In Praise
of Slow: Challenging the Cult of Speed, was heralding
“a growing international movement of people dedicated
to slowing down.” “Sometimes it’s more of a click in
attitude than anything else,” says Carl Honoré, the book’s
author. This is precisely our socionomic point. Things
really clicked for the movement at the outset of wave 1

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United States
in 2008. The NewYork Times documented its arrival with
this January 2008 headline:
The Slow Life Picks Up Speed
The article explained that the “slow food movement,”
emphasizing “above all the creation and consumption
of products as a corrective to the frenetic pace of 21st-
century life,” was starting to pop up across a wide range of
disciplines and lifestyles. “Slow is an idea whose time has
come.”Wikipedia now lists 12 different categories of slow,
from slow gardening to slow parenting, fashion, science
and money.Articles have gotten downright insistent. “Slow
Down!” says a Times of India headline from September
23. To help their kids succeed, “Parents Should Slow
Down,” says another headline from the September 24
News Journal of Wilmington, Delaware. Here’s another
headline that points to an unmitigated reversal from the
bull market: “Slow Coffee Movement Spreading Fast.”As
EWFF has often noted, coffee is the definitive bull-market
beverage. An interesting subhead to the story notes that
the meticulous, slow drip method is called “Third Wave”
and it “Has Growing Following.”We couldn’t agree more.
At this point, the restaurant industry does not seem to be
the least bit threatened; in fact, it is booming. This chart
illustrates why. The SP 500 Restaurant Index’s long rise
from 1990 shows that conventional dining is almost as
highly valued as it has ever been. EWT explained why in
1998 when it identified restaurants as a peak expression
of a bull market in social mood: “When people feel good,
they like to get out, be seen, eat well and drink socially.
This makes restaurants a focal point for the expression of
a bull market mood.” Apparently, restaurants are holding
up until the bitter end. Here again, however, the five-wave
form of the rise suggests that the small decline fromApril
could turn into something much larger.As the bear market
progresses, tastes will shift to alternate, i.e. less expensive,
fare, and many will dine out less or not at all.

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SPECIAL SECTION: MAJOR TOP IN THE BOND MARKET
Excerpted from a June special report jointly from the Theorist and Financial Forecast
BOND YIELDS ARE POISED TO BEGIN RISING ON THE WAY TO DEFLATIONARY CREDIT CRISIS
U.S. Treasury Bonds
Our long term outlook for interest rates on U.S. Treasury securities has been a contrary opinion for many years. Most
commentators have been expecting either economic expansion or Fed-induced inflation to push bond yields higher.
Conquer the Crash predicted that long term rates on AAA-rated bonds would fall much further as the monetary
environment shifted from lessening inflation to outright deflation. Figure 1 shows the forecast from 2002, and Figure 2
updates the graph to the present.
In line with our forecast, the interest rate on the Treasury’s 10-year note has just plunged to the lowest level in U.S.
history. The decline from 1981 to the present is a stunning 91%. Figure 3 shows a close-up of the entire move.
Those predicting economic expansion or hyperinflation have been unable to explain this persistent plunge.Yet each of
these camps got exactly the “fundamentals” they expected: record monetization by the Fed (advocated by the monetarists)
and record spending by government (advocated by the Keynesians). Rates ignored these events and continued to fall.
Figure 2
Figure 1

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For the past ten years, many high-profile investors have
hated bonds. When interviewed, they would say that the
one sure bet was that rates would rise and bond prices
would fall. Those betting against bonds have lost a lot of
money, especially since 2009.
Under the Elliott wave model, five-wave patterns occur in
the direction of the main trend, and countertrend moves
trace out three-wave patterns. Interest rates do not follow
the Elliott wave model as well as stock averages, which
are more responsive to overall social mood. Rates are the
price of just one thing: money. But it is still interesting to
see how many five-wave patterns unfolded in the same
direction as the long decline over the past 31 years, as
labeled in Figure 3.
In the Great Depression, interest rates on lower-grade
bonds trended lower until 1930, and those on high-grade
bonds continued lower until 1931. Then they soared, on
fears of default. Figure 4, published in Conquer the Crash,
shows what happened. (The chart shows rates inverted to
reflect bond prices.)
During the Great Depression, bond prices finally
bottomed, and interest rates peaked, in June 1932 (see
Figure 4); stocks bottomed in July; and those years’only
freely traded (semi-)monetary metal, silver, bottomed
in December. Following expectations under socionomic
theory, the economy bottomed afterward, in the first
quarter of 1933. If the same sequence occurs again, rates
should peak first, stock prices should bottom next, and
individual commodities should make lows throughout
the period, with some of them bottoming last. Finally the
economy will hit bottom.
The preceding peak rate of inflation in that cycle occurred
Figure 3

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United States
in late 1919/early 1920, so the time between the extremes
was just shy of 13 years. In the current cycle, the grand
change from the maximum rate of inflation to a maximum
rate of deflation seems to be on track to consume
approximately a Fibonacci 34 years (+ or – 1 year).
From as far back as 2001, using several time-forecasting
approaches, EWT has forecast that the final stock market
bottom would occur in 2016. This timing suggests a peak
rate of deflation in or near 2015, a bit ahead of the low
in stocks. Although we tentatively expect the bottoming
sequence to take place between 2015 and 2017, the
sequence per se is more certain than its timing.
One might think that interest rates will therefore fall until
around 2016. But they won’t. The reason is that borrowers
are going to default.
Investors think that the issuers of all the bonds they are
buying will stay solvent and pay both interest and principal.
We don’t think so. We think the economy is still sliding
into depression, and when that trend accelerates, investors’
waxing fears will cause them to start selling bonds, which
will lead to lower bond prices and higher yields.
Investor psychology should work like this: As positive
social mood initially retreats, investors looking for a haven
buy bonds that they perceive to be safe. But as social mood
continues to trend toward the negative, fear increases,
deflation accelerates, the incomes of businesses and
governments decline, and bond investors begin to worry
about losing their principal due to bankruptcy and default
by bond issuers. That’s when they start selling bonds, and
rates begin to rise. Rates on the weakest issues rise first,
Figure 4

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United States
but eventually fear spreads to holders even of formerly
presumed safe paper. Finally, the economy contracts so
severely that it reaches depression, wiping out many
debtors and, in the process, many creditors as well.
In the current cycle, low-grade bond yields have yet to
begin climbing. As shown in Figure 5 (again with the
scale inverted), yields for the Baa group have been moving
lower right along with those forTreasuries. Commentators
are saying that investors’ sustained move into bonds is a
sign of fear. But in line with continued predictions of a
“sustained but slow economic recovery,” bond buyers have
reached a state of epic complacency in the belief that all
of these bonds are safe. As we will see in Figure 9, the
spread between rates on T-bonds and Baa corporates has
been quietly widening for nearly a year. This is a subtle
warning of trouble ahead for the high-yield sector.At this
point, we still cannot place “peak” arrows on Figure 5 as
there are on the 1930s version in Figure 4. But we should
be able to do so soon.
Figure 6 shows the history of the Bond Buyer index of
40 corporate bonds during the Great Depression. Figure 7
shows the history of its modern equivalent, the Bond
Buyer 20-bond index. Bond prices today seem poised to
do what their predecessors did: plunge.
In early 1932, prices on these bonds fell below—and rates
rose above—those registered at the preceding peak rate of
inflation in 1920. This is a good reason to expect interest
rates on these bonds in coming years to rise above those
of 1981, i.e. above 16%.
The question is, when will rates begin rising in this
cycle? We think the answer is “now.” Evidence is rapidly
mounting that the trend in interest rates on high-grade
debt is poised to reverse:
1. As shown in Figure 3, the latest drop in yield has
traced out five waves into the June 1 low as bond
futures hit a new all-time high of 152½. This plunge
in rates should mark at least a bottom and probably
the bottom.
Figure 6Figure 5

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United States
2. The public has been buying a lot of U.S.
government bonds since 2002, as shown
in Figure 8. Investors stayed enamored
of government bond funds in 2011 while
selling into the stock rally. The public
loved real estate at the top; it loved stocks
at the top; it loved commodities at the top;
it loved silver at the top; and it loved gold
at the top. What do you think it means now
that the public is heavily invested in U.S.
government bonds?
3. The Commitment of Traders report shows
that Large Speculators have become heavily
invested in T-bond futures (see Figure 9).
Large Specs are not always wrong, but they
are usually wrong when they follow a trend.
The asterisks in Figure 9 show times when
their buying or selling was in concert with
the trend, and in those cases the market was
approaching a reversal.
4. According to the Daily Sentiment Index
(courtesy trade-futures.com), there were
97% bulls among futures traders on June 1.
This is the third-highest reading on record.
(It reached 99% in December 2008, at
the spike high in T-bonds following Fed’s
pledge to buy them.) The DSI reached 90%
bulls in June 2011, and except for a brief
period in January-March it has been near the
90% level for much of the past year. This is
both an extreme level and a lengthy period
of bullish sentiment.
5. T-bonds have enjoyed their longest and
biggest bull market on record. There are no
guarantees in life or investing, but we are
pretty sure that buying an extended market
after three decades of rise is not a good
idea. Regardless of whether our monetary
and economic expectations turn out right,
the bull market in bonds is aged and ripe
for reversal.
If rates do begin to rise as we expect, most
observers will probably be fooled. Bulls on
the economy may take the new trend as a
sign of economic expansion. Those betting on
hyperinflation may take it as a sign that inflation
Figure 7
Figure 8

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is ready to soar. But the real reason for the coming rise in rates will be that investors will be selling bonds and demanding
higher rates due to fear of default. We have seen this development already in the debt paper of Greece and other weak
debtors. It should soon seep over to the stronger debtors.
You might think that the U.S. government is the strongest sovereign debtor. It isn’t. Eight other governments pay lower
rates on their 10-year notes. The U.S. 10-year yield hit a low of 1.438% on June 1, its lowest level ever. But the yields
on comparable bonds elsewhere are lower: Singapore 1.37%, Taiwan and Germany 1.17%, Sweden 1.11%, Denmark
0.93%, Hong Kong 0.88%, Japan 0.80% and Switzerland 0.47%.
The coming fear of default will not be misplaced. With a turn of Grand Supercycle degree behind us, the unfolding
depression will be deeper than that of the early 1930s. Most debtors around the world will default.
What To Do
Generally speaking, if you are invested in long-term debt, sell it. Avoid high-yield bonds like the plague. Stay away
from most municipal, corporate, government agency and now even Treasury bonds.A select few entities will be able to
generate the necessary cash flow to defy an otherwise universal rise in yields. Discerning them will be difficult. Good
candidates seem to be the governments of Switzerland and Singapore, the State of Nebraska and Microsoft Corp.,
but we are not complacent about any of them. If you have substantial assets in long term Treasuries and want to keep
them, one good strategy would be to sell short an offsetting amount of junk bonds, thereby aligning your portfolio for
a continued widening of the spread between the two. If you wish to hold any unhedged debt, make it short term debt.
T-bill rates have been stuck near zero, but if rates overall begin to rise, bondholders will lose money while bill holders
will benefit by rolling continually into higher and higher yields. At the end, the U.S. government might default, so do
not consider this a permanent strategy. It’s only a last debt-based strategy until the ultimate crisis. We have already
recommended substantial holdings of outright cash. But at some point, it will be time to convert even the safest debt
instruments to cash and/or gold.

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United States
In November 1999, The Elliott Wave Financial Forecast
demonstrated the usefulness of this socionomic precept
when the Glass-SteagallAct—the post-1929 crash statute
the U.S. government adopted to “purportedly protect” the
financial industry from itself—was effectively repealed.
Citing the government’s role as “the ultimate bag holder,”
EWFF stated, “The U.S. government may have just
provided one of its greatest-ever demonstrations of this
principle.” That was four months after the all-time high in
the Real-Money Dow (Dow/gold), and two months before
the all-time high in Dow/PPI. Both indexes have been in
a bear market ever since.
On September 14, 2012, the U.S. Federal Reserve upped
the ante in the latest test of our “ultimate crowd” theory
when it introduced QE3, an “open ended” $40-billion-a-
month mortgage-buying program. The U.S. central bank
further stated that it intends to keep the Fed Funds rate
at effectively zero for the next three years. In time, the
Fed’s herculean effort to stimulate the financial markets
and the economy, with the sanction of government, will
illuminate the authorities’ role as the last believer in the
old trend even more brilliantly than Congress’s passage
and repeal of Glass-Steagall, at the beginning and end
respectively, of a Supercycle-degree bull market. To
understand how social mood’s long-term positive trend
influenced the Fed’s actions, we need to travel back to the
central bank’s creation, which occurred in the wake of a
major downside reversal in mood.
The Federal Reserve was established (not at all
coincidently near a major bottom in 1914) at least partially
as a response to the Panic of 1907. In an effort to prevent
financial panic from ever happening again (pipe dream
#1), the Fed was mandated to restrain the “undue use”
of credit in the “speculative carrying of or trading in
securities, real estate or commodities.” (Sound like a
familiar mix?) When runaway financial speculation burst
forth in the late 1920s, the Fed rose to the challenge, or
at least tried to. In “The Stock Market Boom and Crash
of 1929,” economist Eugene White wrote, “The Federal
Reserve had always been concerned about excessive
credit for speculation. Its founders hoped the new central
SPECIAL SECTION: THE GOVERNMENT GRABS THE BAG WITH BOTH HANDS
Excerpted from the October 2012 Elliott Wave Financial Forecast
The Last Believers
When government gets into the act of speculation, the top is usually way past having occurred. Government is the
ultimate crowd, every decision being made by committee. It is always acting on the last trend, the one that is already
over. (For example, the Federal government passed securities laws to prevent the 1929 crash...in 1934.)
—The Elliott Wave Theorist, 1991
bank’s discounting activities would channel credit away
from ‘speculative’ and towards ‘productive’ activities.
Although there was general agreement on this issue, the
stock market boom created a severe split over policy.”
According to economist Murray Rothbard, Herbert
Hoover and Federal Reserve Board Governor RoyYoung
“wanted to deny bank credit to the stock market.” In
August 1929, within days of the Dow’s ultimate peak,
the Fed acted, raising the discount rate to 6%.
As our opening quote from the Theorist notes, government
moves by consensus only, so it did not make structural
changes deemed capable of preventing another crash until
1934, two years after social mood ended its negative trend
and the stock market bottomed. In a bid to strengthen
the government’s capacity to curtail “overtrading,” the
Securities Act of 1934 also gave the Fed power over
brokerage firms’margin requirements. In the early stages
of the bull market, the Fed did not wait long to use its
authority. In April 1936, it raised the initial margin
requirement on NYSE shares from a range of 25 to 45%,
to 55%. Considering that the unemployment rate at the
time was 15%—nearly double its current level—this act
represents an exceptionally conservative stance. Stocks
retreated for a time, only to race back to new highs three
months later. The Fed responded by “doubling reserve
requirements (against deposits) from August 1936 to
May 1937,” right up to and briefly past the March 1937
Cycle wave I stock peak. Economists Christina and
David Romer state that the Fed was “motivated by fear
of speculation and inflation.”
The all-important upper line of the Supercycle-degree
trend channel that dates back to that 1937 peak is shown
on the next chart. After the next touchpoint, the Cycle
wave III peak in February 1966, a speculative binge
accompanied the Dow’s double top in 1968-1969.The Fed
felt compelled to act again in June 1968 by raising margin
requirements to 80%, once again “to curb speculation.”
The Fed also pushed the discount rate to 6% inApril 1969.
In 1970, then-Fed Chairman William McChesney Martin
famously stated that his job was “to take the punch bowl
away when the party is getting good.”

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United States
By 1974, with the DJIA touching
the bottom channel line, the Fed
acknowledged the bearish trend
of Cycle wave IV by reducing
NYSE margin requirements for
stock purchases to 50%, where
they remain today.
In 1984, a Fed study “cast
significant doubt on the need
to retain high initial margins to
prevent excessive fluctuations
of stock prices.” When the Great
Asset Mania finally pushed
the Dow through the top of its
Supercycle-degree channel line
in 1996, Fed-mandated margin
hikes were taken completely off
the table. In December 1996,
after the Dow made its first
decisive break through the top of
the channel, then-chairman Alan
Greenspan issued his famous
“irrational exuberance” comment, citing “unduly
escalated asset values.” Yet, unlike his predecessors, he
did nothing to change margin requirements.A margin debt
explosion in early 2000 “prompted some policymakers
to debate the idea of changing margin requirements to
stem possible speculative excess,” but a Federal Reserve
paper issued the day after the SP’s March 23, 2000 peak
(“Margin Requirements as a Policy Tool”) quashed the
idea: “The bulk of the research indicates that changes in
requirements do not have a significant permanent effect.”
Ultimately, though, the Fed stayed true to its historical
pattern of raising the cost of credit near the end of upside
extremes along the trendline, hiking the discount rate to
6% in May 2000.
In 2006, with the Dow once again pushing to new highs
above the top of the trendchannel and the real estate
mania at peak pitch, the Fed raised the discount rate one
notch higher, to 6.25%. In a critical change, however, it
did not wait for the Dow to reverse course before easing
again. In the first stage of a bear-market prevention effort
that continues to this day, the Fed reduced the discount
rate to 5.75% in August 2007, two months ahead of the
Dow’s October peak. Various government-sanctioned
financial bailouts also coincided with the developing
stock market reversal. The almost instantaneous impulse
to “do something” represented a historic departure from
previous behavior. EWFF’s November and December
2007 issues noted that government bailouts generally
“appear successful because they tend to come at lows,”
and added that the 2007 bailouts were “too close to the
market’s peak” to work. The word “appear” is actually the
key to that forecast, because it is a reference to the actual
cause of the market’s reversal: a change in the direction
of social mood. This change is far more powerful than
any action the Fed might take to induce a desired market
outcome. What matters is not the specific action that the
Fed may take, but the fact that it feels compelled to act
by virtue of the social pressures under which it operates.
In the case at hand, the Fed’s long-standing objectives
have been reversed. Instead of exercising its original
mandate to restrict excessive speculation, the Fed is doing
everything in its power to keep buyers’animal spirits alive,
even as the Dow is at its 75-year upper trendline. The
open-ended nature of the promise to provide quantitative
easing indefinitely and the stated objective of creating
a wealth effect in the form of higher stock prices are
unprecedented. “Fed Aims to Drive up Stocks,” says
a September 14 Washington Post headline. Here’s the
basic plan in Bernanke’s own words: “If people feel that
their financial situation is better because their 401(K)
looks better, they’re more willing to go out and spend,
and that’s going to provide the demand.” Never mind the
foolishness of the demand-theory of economic growth.
Just as EWT theorized in 1991, the Fed is getting into
the act of speculation with the top long past. It will pay a
steep price for goosing the old trend near its end and for
fighting the new trend as it begins.

24
2013 Edition
OVERVIEW
Excerpted from the November 2012 European Financial Forecast
European blue chips remain well beneath their 2011 top,
but at least one measure of complacency has surpassed this
prior sentiment extreme. The chart at right plots the iTraxx
European Crossover Index, which follows the movement
of credit-default swaps (CDS) on 45 sub-investment grade
corporations in Europe. It essentially shows a 180 degree
shift in sentiment — from credit traders’ persistent fear
about corporate defaults in early 2009 to their full-fledged
confidence in corporate debt today. In fact, the index fell
to new lows in October, meaning that credit traders are
more confident about corporate credit quality than at any
point in the index’s four-year history. Regardless of the
market’s near-term direction, one thing is certain: This
kind of complacency will disappear when stocks home in
on another long-term low.
Elsewhere, the aftereffects of a long uptrend in social
mood are also on display. In September, we showed a chart
depicting sinking sovereign CDS premiums and observed
that the sharpest declines were in the very countries where
funding conditions are a problem. Optimism has since
spread from the countries that will eventually need rescue
financing to the funding facility that will purportedly
provide the money. On October 2, Europe’s temporary
bailout fund, the European Financial Stability Facility
(EFSF), sold three-month bills at a negative yield of -.04%.
So, despite a steady deterioration in the European economy, fixed-income investors are not just eager to loan money
to the facility, they’re willing to accept a known loss over three months in order to do so. Long term, too, investors’
faith in the bailout fund seems virtually unshakable. “[A]cross all asset classes, investors were risk-on,” reported a
Barclays banker, who led the EFSF’s five-year, €5.9 billion debt deal on October 16. Indeed, this longer-term debt
issuance was twice oversubscribed, attracting orders in excess of €12 billion.
Many point to the allegedly limitless bond-buying program of the European Central Bank as the reason for traders’
returning confidence. “If you’re convinced that the central bank will respond every time markets tank, that puts a floor
under prices,” a London-based economics professor tells the Financial Times.
Until now, Germany’s finance ministers had been the biggest detractors of the plan. But as ECB president Mario Draghi
drummed up support for it, Germany’s customary caution evaporated. On October 24, Draghi “entered the lion’s den,”
(Reuters, 10/24) for a two-hour grilling in front of 100 politicians at the Reichstag building in Berlin. Two hours later, he
emerged unscathed, while the lions had turned into kittens. “Draghi Charm Drive Softens Edges of German Skeptics,”
reported CNN. “His answers were very convincing,” a senior German lawmaker told reporters after the meeting.
Europe
Follow this link for the most up-to-date analysis of European markets: http://www.elliottwave.com/wave/MIEFF

25

Europe
Forgive us if we are not convinced. The plan is essentially
the same one presented in May 2010, when eurozone
authorities created Europe’s first €440 billion bailout
facility to deal with Greece’s first sovereign debt crisis.
For that matter, it’s the same plan that turned up again, in
March 2011, when Portugal’s debt bubble popped, and the
European parliament approved the EFSF’s successor fund,
the European Stability Mechanism (ESM). Today, Spain
is flirting with bankruptcy, and Italy still struggles under
a higher debt burden than Greece, Portugal and Ireland
combined. Here again, uptrending stocks have buoyed
confidence, so authorities believe they can step in when
they’re needed, where they’re needed. A renewed market
downtrend will shatter this illusion.
Translating Central Bank Newspeak
At least one former optimist has become surprisingly
gloomy of late: the Bank of England. In a significant
departure from the optimism that pervades the Continent,
BoE governor Mervyn King warned in October that the
Bank’s “unorthodox actions” (FT, 10/24) were reaching
the limits of their effectiveness. As EFF has previously
discussed, the word unorthodox doesn’t begin to describe
the BoE’s actions following the 2008 financial crisis,
which include nine interest rates cuts and £375 billion of
quantitative easing.
We constantly read that the central bank’s policy is
accommodative, meaning that official bank rates are low
and should spur robust lending and borrowing across
Britain. This chart of Britain’s official bank rate back to
1900, however, shows precisely the opposite: that bank
rates stayed low throughout the Great Depression and
still failed to stimulate the economy. Somehow, the BoE
may have gotten this message and is starting to rethink the
effectiveness of its monetary policy. Said King in October,
“I am not sure that advanced economies in general will
find it easy to get out of their current predicament without
creditors acknowledging further likely losses ....”
Translation: The Bank of England won’t bail everyone out.
King continued, “When the factors leading to a downturn
are long-lasting, only continual injections of stimulus will
suffice to sustain the level of real activity. Obviously, this
cannot continue indefinitely.”
Translation: We’ll eventually have to turn off the stimulus
spigot.
In August 2009, EFF described the ultimate effect of
money printing, which is to “warp free market prices and
distort the critically important information they provide.”
In fact, central bank stimulus is doubly negative, because
it pushes investors and business owners to misallocate
even greater amounts of capital, thereby prolonging the
eventual economic slump. The Great Depression was a
torturously protracted affair for Europe. All the evidence
suggests that today’s downturn will be an even longer,
slower slog.

26

Europe
THE STOCK MARKET
Excerpted from the November 2012 European
Financial Forecast
Europe’s main stock indexes have so
far failed to commit resolutely in either
direction, emerging from the traditionally
weak months of September and October
unharmed. Stock market tops are almost
always a protracted affair as optimism
leaks out of various sectors and indexes,
one by one.
The September 2012 EFF discussed
Europe’s “dangerously splintering”
markets,highlightingtherally’shistorically
low volume, waning momentum and
near- and long-term price divergences. To
reiterate, this is not the kind of behavior
that signals a healthy long-term advance.
Likewise, a multitude of subindexes
display the kind of staggered finish that
signals exhaustion of a larger trend. The
chart at bottom right shows six subsectors
of the FTSE 350 index. After dropping
uniformly in 2008 and early 2009, three
of these critical industries — banks,
construction and real estate investment
trusts (REITS) — have merely stumbled
along near their 2008-09 lows. Two
more sectors — mining and financial
services — recovered more of their 2008
sell-offs, but peaked nearly two years ago
and have given back about half of their
gains already. And auto shares, while still
levitating as a group, are almost certainly
angling toward another long slide. The
long-term bear market will publicize
its return with a sell-off that reaches
just about every stock market index and
indicator.

27

Europe
CULTURAL TRENDS
Excerpted from the October 2012 European Financial Forecast
During the bear market, the independent nations of Europe will rediscover their borders and rekindle the animosities
that kept them apart for centuries.
—Elliott Wave Financial Forecast, May 2005
At this point, 13 years of downtrending mood isn’t only exposing the rivalries among the member nations of the
European Union; it’s also prying apart the provinces, principalities and semi-autonomous regions within the nation-
states themselves. In July 2011, EFF highlighted the Scottish National Party, saying that its historic May victory
all but guaranteed a referendum on Scottish independence. According to the Financial Times, the first minister of
Scotland, Alex Salmond, has promised to hold a referendum on independence in the autumn of 2014. In Belgium,
the divide between the country’s Flemish-speaking and French-speaking regions has narrowed somewhat since
June 2010, when a leader of the Flemish nationalist party, Bart de Wever, won a “stunning electoral success” (NYT,
6/13/10). In Italy, however, divides are opening up between Rome and the country’s heavily indebted southern
regions. Sicily, for instance, is one of five Italian regions with special statutes on autonomy. Despite the region’s
massive €5.3 billion in public debt, a June
report by the audit court (Economist, 7/28/12)
found that Sicily has more than five times as
many public employees as the government of
neighboring Lombardy, which has twice the
population. Tensions here are about as high as
they are in nearby Sardinia, where a protest by
Sardinian workers in Rome turned violent in
September.
The chart at right shows a clear separatist
movement rising in Spain. In fact, “Catalonia
Is Not Spain,” according to the banners at the
September 11 Diada de Catalunya, which
commemorates the defeat of Catalan troops
during the War of the Spanish Succession.
In the past, marches to support Catalan
independence have never numbered more than
50,000, according to city police. This year,
pro-independence demonstrations drew more
than 1.5 million, as Catalan PresidentArtur Mas
promised to push for independence from Spain
unless the central government allocates a larger
share of tax revenue to the region. “The road to
freedom for Catalonia is open,” declares Mas.
If we’re correct that much of the IBEX’s
bear market remains ahead, Mas’s road to
an independent Catalan state should pick up
significantly more traffic.

28

Europe
SPECIAL SECTION: THE INTERNATIONAL BANK HEISTS BEGIN
Excerpted from the April 2013 European Financial Forecast
There is an invisible group of lenders in the money game: complacent depositors, who — thanks
to [federal deposit insurance] and general obliviousness — have been letting banks engage in
whatever lending activities they like.
—Conquer the Crash, 2002
Many bank depositors will lose their savings, and their only crime will have been to believe the
government’s deposit guarantee.
—Elliott Wave Theorist, August 2008
Last month, the financial press churned out a veritable encyclopedia-length discourse on the death of Cyprus’s financial
sector. However, one glaring question remains: How did everybody miss it? Actually, the puzzle is far more perverse,
because not only did the experts fail to foresee the Cypriot banking debacle, these very professionals who were responsible
for recognizing the good banks and rooting out the bad ones were, in fact, lauding Cypriot banks throughout their entire
decline.
The chart at right depicts a sampling
of the accolades that the global finance
community bestowed on the Bank of
Cyprus during its six-year trek into
insolvency. Starting with the bank’s 2008
award for best bank from Global Finance
Magazine, the trail of tributes continued
in 2009 and 2010, when the bank received
quality recognitions from The Banker
magazine and JP Morgan Chase. Even as
late as 2012, with the bank’s shares down
98% from their all-time high, the Bank
of Cyprus still received a 2012 private
banking award from the internationally
renowned financial journal Euromoney.
The Bank of Cyprus website described
its bookending tribute from Euromoney
this way: “This is yet another major
international distinction which confirms
the successful path taken by the Bank
of Cyprus Group, placing it among the
world’s top financial institutions offering
private banking services.”
The startling irony is that the bank’s
description is exactly correct. Thanks to
an entrenched system of fractional reserve
banking, most of the world’s top financial
institutions are fundamentally no sounder
than the Bank of Cyprus. Few investors
cared when authorities suspended trading in the bank last month. However, this widespread obliviousness will shift
dramatically as the Continent’s larger, more well-known banks follow suit.

29

Europe
The Die Has Been Cast
Above all else, the country’s ongoing deposit debacle
confirms the value of EWI’s defensive posture toward
banks. On Monday, March 18, under pressure from the
European Commission, the European Central Bank and
the International Monetary Fund, Cypriot President
Nicos Anastasiades agreed to confiscate 6% to 10% of
Cypriot bank balances to partly offset the bailout’s €17
billion price tag. By Tuesday, nervous depositors were
emptying ATMs, officials had shuttered banks across
the island, and the proposed levy had even sparked an
international incident with Russia — where most of the
large depositors are believed to hail from. Unveiled last
week, the rescue’s terms reveal the startling trajectory that
bank officials took, one that will unquestionably become
a road map for the Continent’s future crises. Under the
amended agreement:
• Cyprus will close its second largest bank, Cyprus
Popular, and customers will lose the vast majority
of their €3 billion of savings. According to the
Cypriot financial minister, in fact, the bank is
likely to return just 20% of its deposits to large
account holders, and the process may take as
long as six or seven years. Meanwhile, authorities
will move Popular’s healthy assets to the Bank
of Cyprus, which will undergo a separate
restructuring.
• Under those terms, 37.5% of deposits over
€100,000 will be swapped for bank equity,
which is now next to worthless. This levy will
affect more than 19,000 depositors holding a
combined €8 billion in assets. “In effect, that
cash will immediately disappear from depositors’
accounts,” explains the Wall Street Journal.
• Yet, the immediate loss to uninsured Bank of
Cyprus customers will be far higher than 40%.
Bloomberg, in fact, reports that the bank levy will
reach at least 60% when factoring in a temporary
22.5% “deposit withholding,” which will receive
no interest and could undergo further write-offs.
• Cypriot banks closed for nearly two weeks last
month.WhentheyreopenedonMarch28,officials
limited daily withdrawals to €100 and permitted
travelers to take just €1,000 overseas. Some
officials say the government will lift the capital
controls next week. Others say that a month or
more may pass until authorities can completely
remove the restrictions. Either way, for the first
time in the euro’s history, a government has
blocked its depositors from accessing their money
for an extended period of time.
Despite these stunning developments, analysts remain glib
and the financial press blasé. “I really don’t care,” says the
chief executive of the world’s largest money management
firm. “Cyprus Just A ‘Hiccup’ For Stock Rally,” reads a
March headline from CNN Money. “Cyprus is a unique
case,” said Spain’s finance minister last month. “Slovenia
will not be the next Cyprus,” reiterated that country’s
economic leader. As with each of the Continent’s four
previous rescues, authorities are apathetic because stocks
and social mood are peaking.
Bond investors, too, have largely shrugged off the news.
The chart on page 5 shows that 10-year bond yields in
Greece, Portugal, Italy and Spain have barely budged since
hitting a two-year low in February 2013. For that matter,
even Cyprus’s insured depositors — those with account
balances below the €100,000 threshold — appear to be
exceptionally relaxed for having just narrowly escaped a
bank robbery. Indeed, Cypriot banks reopened to a few
long lines on March 28, but the country avoided outright
panic.
If anything, the monthlong debacle shows the value of
socionomic thinking over that of mainstream economic
wisdom. Most analysts routinely fail to uncover economic
trouble, because they fail to recognize the stock market’s
incredible value as a barometer of social mood. “It was a
lightning bolt out of nowhere,” a 50-year old Cypriot taxi
driver tells theWall Street Journal. In the near future, other
large and small banks across the eurozone will be zapped;
those deposits, too, will seemingly disappear in a flash.

30

Europe
SPECIAL SECTION: TRANSPORTATION LOSING TRACTION
Excerpted from the November 2012 European Financial Forecast
Back in September, EFF presented a snapshot of Europe’s flailing shipping industry, noting that “weakness in shipping
often provides early warning for a broader economic decline, because bulk transport represents the first link in the
consumer-goods supply chain.” Today, it’s clear that the European car market provided another early tell. In January
2012, EFF discussed how the pending bankruptcy of Swedish carmaker Saab portended another dark road ahead for
Europe’s auto industry. Three months later, we showed a chart of collapsing EU car registrations and speculated why
the auto market seems especially sensitive to credit deflation:
For one thing, most consumers tend to buy cars solely on credit, so auto sales quickly reflect changes in credit availability.
In addition, new cars represent a discretionary purchase, meaning potential car buyers can usually forgo the purchase
and still get by.
—European Financial Forecast, April 2012
The chart below adds detail to the industry’s snapshot that we showed in April. It depicts a three-month moving
average of individual registrations in Italy, Spain, France and Germany, as well as collective car registrations within
the 17-nation eurozone. Four of the five metrics just fell to new lows for the bear market, with the pace of deterioration
clearly accelerating. In fact, car deliveries plunged 11% in September, generating the largest year-over-year decline
in 19 years, according to the European Automobile Manufacturers’Association (ACEA).
Germany represents the car industry’s lone bright spot, as registrations have trended largely flat. But even here, demand
is drying up and desperation growing acute. For the third time this year, BMW reintroduced its “lease pull-ahead
program,” an incentive that lets lease owners skip up to three payments on new or used vehicles.

31

Europe
The move follows another widespread sales-boosting
tactic called “Specialty Demo Allowance,” where car
manufacturers pay dealers cash bonuses (up to $7,000 in
BMW’s case) to add cars to their demo fleets. Even though
dealers are essentially selling vehicles to themselves,
the ploy allows them to chalk up transactions as if
they’re genuine sales. According to Bloomberg, “self-
registrations” now account for at least 30% of Germany’s
new car registrations.
Industry experts see Europe’s car market shifting into
recession. We think that the professional outlook still
massively underestimates the demand-reducing potential
of the current deflation. ACEA’s gloomy October 16
report coincided with a moderate drop in Europe’s top
automobile- and tire-makers. The chart at left, meanwhile,
shows the share performance of the six largest European
automakers back through 2005. Notice that only BMW
managed to exceed its 2007 high, with Fiat, Daimler,
Renault and Volkswagen (Europe’s largest automaker)
down 50% to 70% from their previous highs.
The bottom graph on the chart shows the brick wall that
Europe’s No. 2 automaker, Peugeot, just crashed into.
In addition to cutting 8,000 jobs and closing factories,
Peugeot is frantically selling assets in order to raise cash.
In October, the French government engineered a rescue
for Peugeot’s financing unit, Banque PSA Finance, with
analysts putting the tab at €4 billion in bank guarantees
and €1.5 billion in new credit lines. Bloomberg calls
the move an “indirect bailout,” but the sheer size of the
rescue package is at least on par with Paris’s previous
intervention in its car industry in February 2009. Then,
the French government extended Peugeot and its smaller
rival, Renault, €6 billion in low-interest loans, seeking to
bolster the companies’ liquidity in the wake of the 2008
banking crisis. This deterioration in business followed by
another bailout will spread to innumerable other sectors
and industries as credit deflation intensifies.

32

Europe
SPECIAL SECTION: SWAPPING OUT FEAR
Excerpted from the October 2012 European Financial Forecast
Over the past three years, as the credit crisis
secured footholds in former bedrock economies
across the Continent, EFF has persistently
directed readers’attention to the source of credit
deflation: a large-degree social mood decline.
To be sure, the credit crunch won’t end until the
bear market does. On the heels of a multimonth
bounce, however, funding problems appear to be
hibernating, economies appear to be breathing
signs of life, and key financial players are
positioning themselves for another financial
springtime.
Notice, for instance, the sinking costs to
protect bondholders from a sovereign default.
Credit-default swaps allow traders to hedge
against (or, more directly, to gamble on) a
debtor’s creditworthiness, so you would think
that swap premiums in Europe would be rising.
Yet, swap premiums are down across the board,
with the sharpest declines showing up in the
very countries where funding conditions are
most problematic. The top four panels depict
CDS premiums across four of the five PIIGS
nations: Portugal, Italy, Ireland and Spain. CDS
rates in Ireland, one of Europe’s earliest bailout
recipients, fell beneath a two-year low, while
Portuguese default protection is the cheapest
since February 2011, just two months before
Lisbon activated its €78 billion financial aid
package.
Meanwhile, core European rates have also fallen
precipitously. Observe that French, Belgian,
Swedish and Dutch swaps are probing recent
lows, while German rates slid below 50 basis
points in September. Here, too, the last time
derivatives traders paid this little for credit
protection was July 2011, as the DAX teetered
on the brink of a two-month, 34% sell-off.
“Another banana skin has been averted,” a
currency strategist tells the Wall Street Journal.
In fact, the diminishing cautiousness of credit
traders suggests the opposite: that the financial
floorboards are slippery again. The difference is
that stocks stand to slide much further this time
around, meaning that much larger pools of shaky
debt will also hit the skids.

33
2013 Edition
KOREA: UP ON GANGNAM STYLE
Excerpted from the November 2012 Asian-Pacific Financial Forecast
The KOSPI continues its stairstep advance in a series of
ones and twos. The index is now sitting on the long-term
uptrend line from its 1962 low (see chart at right). If
it falls below its July wave 2 low of 1759, about 7%
below current levels, then the odds would increase that
the alternate count on the monthly chart is correct.
Sentiment support for a rally now comes from South
Korea’s Manufacturing Business Conditions Survey,
which in October fell to its second-lowest level of
the past decade. The worsening conditions associated
with wave 2 and wave 2 demonstrate Elliott Wave
Principle’s observation that fundamental conditions
during second waves are “often as bad as or worse than
those at the previous bottom.” The surveyed conditions
should eventually rise to record highs as Korean stocks
continue their advance in wave 3.
The KOSPI’s gradual advance in the face of dismal
economic fundamentals fits the mixed mood of the
corrective period of the past two years.That mixed mood
is also evident in the sudden popularity of “Gangnam
Style,” a song and dance video by South Korean pop
musician Psy. Bloomberg columnist William Pesek hit
the nail on the head when he wrote, “Psy’s song and
ubiquitous video parody the tony neighborhood [of
Asia-Pacific
OVERVIEW
The Asian-Pacific region sports a broad range of stock price patterns, and thus a broad range of expectations. The
SoutheastAsian bulls, such as the Philippines, continue to power higher, well above their 2010 and 2011 highs. Others
such as Turkey and India are approaching their own 2010 and 2011 highs. Still others, such as Korea, have fallen back
in small-degree second waves. And at the other extreme, laggard Vietnam needs to decline several percent more as it
moves toward an intermediate-term low.
In contrast to peace overtures in SoutheastAsia and LatinAmerica, the tension between China and Japan over territorial
issues continues to grow. That negative social mood supports our forecasts for significant lows in Northeast Asia.
Follow this link for the most up-to-date analysis of Asian-Pacific markets: http://www.elliottwave.com/wave/MIAFF

34

Asia-Pacific
AN ELLIOTT WAVE PERSPECTIVE ON CHINA'S STOCK MARKET
Excerpted from a September special report from The Asian-Pacific Financial Forecast
Over the past half century, Chinese society has passed from a dark age to a golden age. From the misery of the Great
Chinese Famine (1958–1963) and the chaos of the Cultural Revolution (1966–1976), hundreds of millions of Chinese
people have lifted themselves out of poverty and into a world of progress where they believe they can succeed.
From an Elliott wave perspective, China’s boom of the past few decades exemplifies the growth phase of the natural
cycle of growth and decay inherent in all societies. China has experienced numerous such long-term cycles in its
history. The one that began in the late 20th century is just the most recent.
Ralph Nelson Elliott recognized a long-term cycle at work inAmerican society when he discovered the Wave Principle
in the early 1930s. He recognized that the 1929–1932 collapse in U.S. stocks he had just witnessed was simply a natural
reaction to the boom of the prior several decades. His
discovery of wave patterns in stock prices led him to
conclude that the Great Depression was a large-degree
bear market — and that, therefore, a large-degree
bull market lay ahead. In their 1978 book, The Elliott
Wave Principle, Elliott’s intellectual descendents, A.J.
Frost and Robert Prechter, made a similar forecast
for American stocks and society near the end of the
1966–1982 bear market in the Dow Jones Industrial
Average.
Our long-term wave count for Chinese stocks finds
Chinese society today at a similar turning point. China
launched its modern stock market in 1990, which
provides us only about 22 years’ worth of actual index
price data. But using knowledge of historical events, as
Elliott did, we can estimate how prior waves progressed,
thus providing context for the picture as a whole.
This chart shows the likely pattern of China’s advance
of the past half century. Notice how the structure of the
advance conforms to Frost and Prechter’s depiction of
an idealized impulse wave whose middle waves are
extended (see next page). This structure implies that a
multi-year advance in Chinese shares lies directly ahead.
Gangnam] and poke fun at the crass materialism that has consumed a country that just 15
years ago was beset by economic turmoil. … By both celebrating this phenomenon and
mocking it, Psy caught the bipolar nature of Korea’s economy.”
The financial crisis of 2008 and even the correction of 2011 probably brought back
memories of the lost decade of the 1990s and early 2000s in many emerging Asian
markets. Psy’s bouncy tune and horse-dancing marks a break from the mood of austerity while
offering a preview of more positive times ahead.

35

Asia-Pacific
Boom Ahead
The long-term wave pattern in the Shanghai Composite
is the primary justification for our bullish forecast for
China, but plenty of other technical evidence supports it.
Pattern
The correction since the 2007 high in the
Shanghai Composite is unfolding in wave IV as
a contracting triangle. This particular pattern,
which often occurs as the fourth wave of a five-
wave structure, is labeled a-b-c-d-e. Wave (C)
of C down is developing as a textbook impulse
wave, as wave 5 has fallen on slower momentum
than did wave 3.
Source: Elliott Wave Principle (1978)
Source: Elliott Wave Principle (1978)
THE END OF INDIA'S MALAISE
Excerpted from the October 2012 Asian-Pacific Financial
Forecast
Indian stocks also show a stair-stepping pattern of ones
and twos. The pattern is clearest in banking stocks in the
short term (see BSE Bank Index in weekly chart) and
in auto stocks in the long term (see BSE Auto Index in
monthly chart). The pattern in the BSEAuto Index, which
continues to lead the market as it has since the early 2000s,
looks similar to the one it displayed just before it rocketed
higher in 2003. If the Nifty falls below 5449, about 6%
below current levels, it would mean that the advance from
the June low is corrective rather than impulsive.
In September, we observed how bad the social gridlock in
India had become and said that the wave pattern in Indian
stocks would eventually resolve the nation’s leadership
crisis. The series of ever-smaller second-wave lows has
now broken the impasse. A week after the wave 7 low
in the BSE Bank Index, Prime Minister Manmohan Singh
risked the ruling coalition’s Parliamentary majority to
announce several controversial economic reforms with the
promise of more to come. Conventional observers credit
the announcement for driving stocks higher. A better way

36

Asia-Pacific
to view the event is that extreme frustration at the
end of a three-year period of no net progress in India
forced a change in Indian society.
We can see how deep the pessimism had become
in the two magazine covers above. The week
before the wave 7 low in the CNX Nifty, a sub-
headline on Time magazine’sAsia cover said that
“India needs a reboot” and questioned whether
Singh was up to the job. Even as the Nifty shot
up,The Economist last week published a 14-page
special report, titled “Aim Higher.” It is critical
of the government and shows how entrenched
the pessimism remains. Paul Montgomery of
Montgomery Capital Management has long
observed how magazine covers tend to trumpet
financial trends just as they are about to change.
From that perspective, these two covers are
blaringly bullish. By the end of wave 3 up in
the Nifty, observers will again laud Manmohan
Singh as a great reformer, as they did at the end
of wave 1 up, and more people will talk about
Indian dreams in a positive light.
AUSTRALIA: RESILIENCE DOWN UNDER
The ASX All Ordinaries continues its third-wave advance. Key indexes continue to suggest that the advance from
the 2011 low is impulsive. In October, we saw how the ASX 200 Financials Index appeared to be leading the market
impulsively higher. That index is vying for pole position with the leading sector index, the ASX 200 A-REIT Index,
which in October exceeded its 2009 wave A high. The A-REIT index also recently hit its highest weekly momentum
so far in the rally from the 2011 low, which supports our view that the advance is a third wave.
A RETAIL BELLWETHER
A pattern in the stock price of Woolworths,Australia’s largest retailer and grocery chain, also suggests that the nation’s
economy is returning to growth after the corrective period. The stock recently rose impulsively above its 2010 high
after completing what may have been a three-wave correction. Two caveats to this forecast are that the stock’s wave
C failed to fall below the end of its wave A and that its correction since its 2007 high was quite shallow. Those flaws
may mean that the correction is not finished, or they may simply reflect Woolworths’strong growth story. In fact, the
stock’s two prior corrections were also shallow.

37

Asia-Pacific
“I don’t want anyone to rush out there and say I see the
sun coming up. I can see the early signs and time is a
great provider of that confidence,” the company’s CEO
said last week, reflecting the cautious optimism of the
early stages of a new advance. (Sydney Morning Herald)

The State of Global Markets 2013

The State of Global Markets 2013

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