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European Stocks: Not As Chaotic As It May Seem
In terms of price movement, both bull and bear markets are quite orderly.
I'll bet that if you ask ten people which of these two words – "order" or "chaos" – they associate bull and bear markets with, eight out of ten will say that bull markets bring order, while bear markets are chaotic.
Somehow, in our minds, the periods of declining prices of stocks and other assets are associated with uncertainty and chaos. Robert Prechter, EWI's founder and president, explores this subject in-depth in his excellent "Wave Principle of Human Social Behavior" – but I have no room in this short column to cite the findings Bob presents in that book. Let me just say that in terms of price movement, both bull and bear markets are quite orderly. You want proof? OK.
"The Wave Principle holds that stock markets reflect the social psychological states and trends of humankind and display patterns of progress and regress consistent with Fibonacci ratios. The performance of European stock indexes from their 2001 lows supports this view, since their rebounds often topped near Fibonacci levels.
"The DAX, CAC40, Euro Stoxx 50, IBEX, and SP/MIB peaked near Fibonacci .382 retracement; the AEX, SMI and CECE peaked near a .50 retracement; and the FTSE250 peaked near a Fibonacci .618 retracement." – The January 2009 European Financial Forecast, p. 2.
And these are just the long-term numbers; the markets aim for and turn at important Fibonacci price levels every single day – in bull OR bear markets. How's that for "chaos"?
In defense of mainstream investors, it's understandable why they think bear markets are disorderly – after you read a news report like this one, for example (source: AP):
"The Bank of England on Thursday cut interest rates to the lowest level in its 315-year history, taking it into uncharted territory as it attempts to ward off a prolonged recession."
We may indeed be entering an "unchartered territory" in this bear market – but every decline and rebound still has structure. And structure means patterns, and patterns mean that we can study and forecast them. Which is exactly what the editor Tom Denham does in the new, January issue of his European Financial Forecast for the following markets:
- Germany's DAX stock index
- France's CAC40
- The Netherlands' AEX
- Switzerland's SMI
- Spain's IBEX 35
- Italy's MIB 30
- Dow Jones Euro Stoxx 50
- Russia's RTS
- Eastern Europe's CECE Overall Traded Index: Hungary, Poland, Czech and Slovakia.
- PLUS, a new 3-page report, "British Housing, Stocks and Social Mood Still Have Far to Fall" by EWI's Alan Hall. Excerpt: "Our Elliott analysis suggests that more downside surprises are in store, so let's review our outlook on the scope of the decline."