History doesn't repeat itself, but it does rhyme.
Mark Twain
At one time or another, most of us have had that strange sense that we've seen something before: The uncanny feeling that something you experienced in the past is happening in the present.
The more I research financial patterns here at Elliott Wave International, the more I find myself with a nagging sense of déjà vu.
Pete Kendall must have gotten that oddly familiar feeling last month when he first read about the gaggle of billionaires who pledged to donate half of their fortunes to charity. Read Pete’s comments from last month’s publication:
But even as the rally makes its play for a revival of the glory days, the mania flashbacks betray its exhaustion.
Back in April 2000, when the NASDAQ was just three weeks into its bear market, EWFF described charity as "the ultimate luxury," and stated that the act of giving tens to become a cause celebre when a social mood uptrend has reached an extreme.
Today, right on cue, headlines extol 16 billionaires' "Pledge to Donate" half their fortunes to charity.
Elliott Wave Financial Forecast (Dec. 2010)
So what does this pattern of behavior mean for investors?
To find out, it's vital to do the research.
Even before April 2000, Pete Kendall and Bob Prechter had identified a correlation between an increase in large charitable donations and major turns in the stock market. In a chapter titled "The Classic Traits of a Once-in-13-Lifetimes Financial Bubble," the authors highlight a trend they first noticed in 1997:
Then there is the ultimate luxury, charity. It is the hip new thing, as super-rich titans have turned their ultra-competitive streaks to handing money out rather then hauling it in.
Leading the pack is Ted Turner’s $1 billion in promised contributions to United Nations’ humanitarian projects.
George Soros followed a few days later with a $500 million gift to Russia. He dropped another $4.5 million on a group of “guerrilla philanthropists” dedicated to New York’s poor.
Bill Gates, the world’s richest man, has also made a down payment on his promise to give all his money away before he dies with a $215 million contribution that will bring the Internet to public libraries.
Meal programs, museums, university foundations and research labs are “thriving on the bull market.” A new magazine, The American Benefactor, was created to court and cajole the “new wealth.” As a spokesperson for the magazine says, “You get to a point where people ask how much is enough.”
The point of maximum satiation, whether it is revealed by lavish gifts or indulgences, will mark the big turn.
The Elliott Wave Theorist, December 1997
Reprinted in The Mania Chronicles, p. 8
History may not repeat itself, per se -- but learning the patterns (or rhythm) of social-mood that precede major market changes will help you prepare for the future.