Everything Rises and Falls Together in All-the-Same-Market Index

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Everything Rises and Falls Together in All-the-Same-Market Index

By Susan C. Walker
Fri, 24 Jul 2009 12:00:00 ET

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Many investors and their financial managers have come to the same shocking conclusion over the past year: that the tried-and-true method of spreading assets around in different markets to avoid risk no longer works. A story in the July 10 edition of The Wall Street Journal amusingly quoted one financial advisor who stood before a group of his peers and said, "Hi. My name is Carl, and I'm a recovering asset-allocationist."

The story goes on to say that "asset allocation, a bedrock of investing for decades, appeared to fail miserably in 2008. The conviction shared by most investors -- that they should spread their money across myriad asset classes to minimize losses -- was shaken as nearly all markets tumbled in unison."

The truth may have dawned slowly for some, but Bob Prechter started writing in 2002 about how all financial markets were trending together, thanks to the bubble created by too much credit. Later, one of his subscribers suggested that he put together an index. He did, and published it in 2007. In these two excerpts and chart, Bob explains why All the Same Market is such an important concept. After all, it explains why so many people have taken hits to their investments, no matter how wide they have spread them.

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Excerpted from Elliott Wave Theorist, December 2007

We at Elliott Wave International invented the phrase “All the Same Market” to refer to the coordinated trends in diverse financial markets that we saw emerging in 2002. … Our new index, the All-the-Same-Market Index, or ASMI, comprises the following eight markets:
S&P 500
Nasdaq Composite index
Gold
Crude oil (Bloomberg West Texas Intermediate (WTI) Cushing)
CRB All Commodities index
Real Estate (US Census Bureau median sales price for new, privately-owned, single-family residential structures)
U.S. 10-year note (generic first future price)
US$ Index, inverted

… Strikingly, this index has not meandered around but marched up and down in distinct trends. Given this noticeable order, we think our index tracks something singular and real, namely the exceedingly rare orientation of the financial marketplace in which the market treats all investments not as competing, somewhat exclusive options but rather as part of a vast array of available items on a smorgasbord where investors can graze among the offerings, blithely paying for them all with the massive amount of credit made available by the banking system….

Why is the ASMI important? To quote the former chairman of Citigroup (from last July), “When the music stops, in terms of liquidity, things will be complicated.” Well, this index will tell us when the music has stopped. As long as the uptrend from 2002 remains intact, the magic levitation will continue. But when the biggest credit-fueled investment mania of all time terminates, this index will tell us so by breaking its lower trendline. At that point, it will indicate that the deflationary crash—the unwinding of the great credit bubble—is finally under way.

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Excerpted from Elliott Wave Theorist, June 2009

The Partial Recovery is Already Maturing
Late February-early March was a great time to step aside from our bearish opinion. The outlook for a rally that would be “sharp and scary for anyone who is short” has pretty well come to pass. Our “All the Same Market” theme has ruled the entire time. In just three months, the S&P has leaped over 40 percent, the dollar has plunged 13 percent, gold, silver, oil and the CRB index of commodities have all rallied, real estate deals have picked up, and the economy is showing signs of recovery. Our prediction for a temporary turn toward optimism meant a rise in the availability of credit, which has fueled all these trends and events. These outcomes are just as one would expect from a turn toward optimism in a deflationary environment where the ebb and flow of liquidity is the financial tail on the social-mood dog.

It has been breathtaking to watch the swift return to all the old false beliefs: the bull market is back; inflation is the main threat; we are running out of oil; real estate is a bargain; and the economy is setting up to boom. We explicitly forecast that investors and economists would return to optimistic views, and it has happened. This is the power of a Primary degree second wave. It shows up in the rally in our All-the-Same-Market Index (ASMI), as shown in Figure 1.

The Bounce is Aging, but the Depression is Young. Get Bob Prechter's latest views on what's really going on in financial markets and the economy in the just-released July issue of The Elliott Wave Theorist. Read more about topics in the issue here.

Tags: deflation, bull market

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