Most fairytales have a catch word or phrase that, when repeated, makes all the danger and pain magically -- "poof!" -- disappear into thin air: "Rumpelstiltskin," "Beetlejuice," "There's no place like home, there's no place like home."
Today, the mainstream financial world lives in a fantasy where such a word exists, too; that word is "different."
Different, as in: The steep decline in home prices now is different than the real estate crisis of 2007-9. The soaring number of defunct mortgages now is different than the credit implosion of then. And most often heard -- the rise in U.S. stocks from its March 2009 low is different, i.e. stronger, "realer," and more permanent than the other advances of before.
The sad irony is this: Only in recognizing the similarities of the past can one truly protect against further losses in the future. With that in mind, take a good look at the following chart below:
This illustration comes directly from the July 2, 1986 Elliott Wave Theorist. The date is no mistake; it's a very relevant chart for our times. There, long-time Theorist editor and EWI's president Bob Prechter revealed how the upside progress in the DJIA displayed two classic Elliott wave patterns in succession: The contracting and diagonal triangles. Here are their definitions:
- Contracting: Occurs in a position prior to the final movement in the direction of the larger trend.
- Diagonal: Indicates exhaustion and is usually followed by a sharp reversal retracing at least back to the level where the triangle began.
So even a single triangle pattern strongly suggests dramatic change. Here, for the first time in the history of the Elliott Wave Theorist, Bob Prechter identified two triangles side by side -- a rare, and notable feat that prompted him to publish a special July 2, 1986 Theorist bulletin calling for "a substantial correction." Over the next four weeks, the market endured its sharpest -- and biggest drop -- for the year.
Now, look at this second chart of the DJIA, from Prechter's January 14, 2010 Elliott Wave Theorist. This one spans a more recent time frame and shows the exact same double-triangle scenario as experienced over two decades ago.
Enter the nearly 700-point drop in the DJIA we've seen since then.
"Different." As a word, it's meant to create a vast distance between now and whatever was too painful to confront then. Yet -- it's also the steadfast refusal to align with the past that ensures its reoccurrence.