"On December 23, 1913, President Woodrow Wilson signed the Owen-Glass Act, creating the Federal Reserve System." (The Library of Congress)
By now, the financial panic of March 2009, when the DJIA slipped below 6,500, is a hazy memory for many investors. The Dow is above 10,000. "The Great Recession" is apparently "over." And according to the popular vote, the man to thank is Ben Bernanke, the chairman of the U.S. Federal Reserve Bank, which celebrated its 96th birthday yesterday.
If you are a student of the Elliott Wave Principle, you understand that what drives the stock market's broad trends are not the Fed's interventions (see Nico Isaac's December 23 article), but changes in our collective unconscious, a.k.a. social mood. Elliott wave patterns in market charts reflect that mood, and the knowledge of those patterns makes markets predictable.
Back in March, amidst the dread, the Dow's Elliott wave patterns started to turn bullish, indicating a strong rally ahead in stocks -- and in our collective spirits, too. That allowed EWI's president Bob Prechter to make this bullish forecast for the Dow in his April Elliott Wave Theorist (excerpt). Note especially the last sentence:
"Wave 2 could carry the Dow as high as 10,000... Wave 2, regardless of its extent, should regenerate substantial feelings of optimism. At its peak...the government will be taking credit for successfully bailing out the economy, the Fed will appear to have saved the banking system..."
Eight months after Bob's forecast, on December 16 Time Magazine named Ben Bernanke its Person of the Year for 2009.
Here's what EWI's December 16 Short Term Update said about the tribute to Mr. Bernanke:
News weeklies most often put the most pressing events of the day on their covers. By the time a financial trend has been in force so long, or is of such a magnitude that it makes it onto the cover of Time or Newsweek, it usually means that trend is near the point of exhaustion and ready to reverse. Time’s Person of the Year has a particularly good track record of reflecting a trends end.
- One of the more famous Person of the Year financial covers was Jeff Bezos of Amazon.com in 1999. That one occurred almost simultaneous to the stock’s top on Dec. 9, 1999 at 113.00. Amazon declined 95% to a low at 5.51 in Oct. 2001.
- Andy Grove of Intel was Time’s 1997 Person of the Year and that stock languished through August of the next year before finally taking off.
- Other financially-related Persons of the Year include Ted Turner (1991), who founded CNN. Turner Broadcasting stock was down over 7% the following year.
The fact that the vast majority of investors do not act upon this information is one of the very reasons why it works so well as an indicant of future price behavior.
Investors' belief in the Fed's omnipotence rebounded together with the stock market rally. The fact that the Fed's best efforts did not stop the Dow from crashing 53% is all but forgotten; the Fed is back "in control." But read the rest of Bob Prechter's April 2009 quote about the wave of optimism we find ourselves in now:
"...and investors will be convinced that the bear market is behind us. Be prepared for this environment; it will be hard for most investors to resist. The perverse result of wave 2 will be to get people even more heavily invested than they already are, just before wave 3 starts."
Read EWI's latest forecasts for the days and weeks ahead now, risk-free. Here's how.