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Date: Tue, 22 Jul 1997 11:52:40 -0700
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From: Paul Andrew Mitchell [address in tool bar]
Subject: SLS: Inefficient Market Hypothesis (fwd)
<snip>
>
>----------------------------Original message----------------------------
>Date: Tue, 22 Jul 97 00:56:52 EDT
>From: Stock Market Update Page <http://www.ucc.uconn.edu/~jpa94001/>
>Subject: Inefficient Market Hypothesis
>
>
>----------------------------------------------------------------------
> To read the following article with related hyperlinks,
> go to the following location:
>
> http://nw3.nai.net/~virtual/sot/j11.html
>----------------------------------------------------------------------
>
>
> ***AN INEFFICIENT MARKET HYPOTHESIS***
>
> By J. Adams
> Revised Edition: 7/21/97
> (Original: 2/25/95)
>
> Recently the Dow Jones Industrial Average (DJIA) reached an all-
>time high just above the psychologically important 8000 mark and has
>since started a significant reversal. Based upon past stock market
>behavior, there is reason to believe that a "Grand Supercycle" top has
>been reached and the worst crash in history is now at hand. This crash
>involves a total upset of irrational popular beliefs and expectations
>and, in particularly, the worldview of economists.
>
> According to mainstream economists, greed, in effect, is good.
>Reigning theory holds that, if individuals and organizations seek to
>maximize utility and profits, respectively, and there is "perfect"
>competition, then, as if guided by an invisible hand, market prices
>and the overall economy will tend toward general equilibrium and
>maximum happiness for all in the long-run. The reality, however, is
>that greed is not good, and, in the long-run, it is leading to the
>collapse of civilization and maximum unhappiness for all. In this
>sense, reigning economic theory constitutes a dangerous extraordinary
>popular delusion.
>
> Stemming from pervasive greed and competition, market societies
>such as our own historically suffer from general disequilibrium in the
>form of persistent price instability and so-called business cycles.
>These cycles involve swings between extreme optimism and pessimism in
>popular mood which, in turn, lead to the formation of irrationally
>high and low collective beliefs and expectations, respectively. On
>Wall Street, irrational swings in prevailing expectations are readily
>observed as general cycles in stock price movements commonly known as
>"bull" and "bear" markets.
>
> Experienced Wall Street professionals have learned that the
>general ups and downs in stock prices can be predicted using technical
>analysis. One effective approach is based upon a contrarian investment
>strategy that involves "going against the crowd" (see David Dreman,
>'The New Contrarian Investment Strategy', 1982). By paying attention
>to "psychological indicators" like the put-to-call ratio and polls of
>investor sentiment , one can determine when extremes of optimism and
>pessimism are being reached on Wall Street and time tops and bottoms
>accordingly (see Martin Zweig's 'Winning on Wall Street', 1986).
>Irrational extremes in consensus expectations are indirectly reflected
>in generally overvalued and undervalued stock prices at major tops and
>bottoms, respectively. Thus, a contrarian investment strategy is also
>applied using indicators of relative historic valuation like price-to-
>earnings ratios and dividend yields (see Dreman's book and/or Norman
>Fosback's 'Stock Market Logic').
>
> With the recent all-time high above Dow 8000, collective beliefs
>and expectations reached an unprecedented irrational extreme. In
>economics and finance this irrationality is reflected in the reigning
>"Efficient Market" hypothesis of stock price behavior. According to
>this hypothesis, in the aggregate, investors form "rational
>expectations" of the future using all available information including
>lessons learned from past mistakes. Assuming the stock market
>efficiently discounts investors' rational expectations, stock prices
>reflect an accurate assessment of intrinsic value based upon
>available, relevant information. Consequently, only new, unexpected
>information can lead to a price change (a movemement of market
>equilibrium). Thus, stock market prices are expected to follow a
>random walk in which only unpredictable, random shocks, i.e.,
>unexpected news, moves prices up and down.
>
> According to the weakest form of the Efficient Market Hypothesis,
>stock prices fully reflect the information implied by all prior price
>movements. Price movements, in effect, are totally independent of
>previous movements, implying the absence of any price patterns with
>prophetic significance; investors should be unable to profit from
>studying charts of past prices.
>
> Unfortunately, the Efficient Market Hypothesis, like economic
>theory in general, is, for the most part, wrong. While pervasive
>evidence of irrational swings in investors' expectations mentioned
>above is sufficient for undermining the key assumption of "rational
>expectations" in efficient market theory, a straightforward way to
>falsify the efficient market hypothesis is by making a prediction of
>the future direction of stock prices based upon historical price
>patterns in the Dow Jones Industrial Average.
>
>
> -Psychological Barriers in the Stock Market-
>
> When the DJIA reaches thousand marks, stock prices meet resistance
>and usually head substantially lower. For example, between 1966 and
>1982, the DJIA reached or slightly breached (by a few percent) the
>"Magic 1000" barrier on five separate occassions: 1966, 1968, 1973,
>1976 and 1981. Following each peak around 1000 on the Dow there was,
>on average, a decline in stock prices of 34.4 percent over the course
>of 17.2 months. Then, in 1982, the DJIA blasted through the Magic 1000
>barrier in a dramatic rally that marked the beginning of a bull market
>that many consider still in force today. When the DJIA approached the
>2000 mark in 1986, it ran into resistance for almost a year, and in
>early 1987 the DJIA broke through 2000 in one of the most dynamic
>rallies (in terms of market volume and breadth) ever observed on Wall
>Street. In 1990, the DJIA climbed to the 3000 level for the first
>time. In mid-July, the Dow closed two days in a row at what was then
>an all- time high of 2999.75 and subsequently entered a sharp, three-
>month correction of over twenty percent. The 3000 barrier was
>eventually breached in 1991 with, again, a historically strong rally.
>The first time the Dow reached the 4000 mark was in January of 1994.
>Specifically, the DJIA reached an intraday high of 3985 and registered
>a closing peak at 3978. Following this test of the 4000 barrier, stock
>prices dropped by ten percent and then struggled with Dow 4000 for
>about a year. (See: "Dow Industrials' Failure to Break 4000 Barrier
>Stiffens Bears' Doubts" in the Wall Street Journal, 9/19/94 & "Once
>Again, Industrials Close In on 4000 Barrier" in the Wall Street
>Journal, 2/6/95.) In November of 1995, the DJIA ran up to the 5000
>mark for the first time and then briefly retreated by five percent.
>Next, after soaring through 6000 last year, the DJIA reached above the
>7000 mark for the first time in February of this year. The Dow then
>retreated to 6300 into April, the first ten percent correction since
>the index tested the 4000 mark in 1994.
>
> The most recent psychologically important thousand mark reached in
>the DJIA is Dow 8000. Last week the DJIA broke above 8000 for the
>first time in history and then reversed sharply. What seems to have
>occurred is a euphoric top at 8000 similar to the peak in the DJIA at
>3000 in 1990. Indeed, it was on July 16th and 17th of 1990 when the
>Dow closed at a then record peak of 2999.75, and it was on July 16th
>and 17th of last week that the Dow closed above the 8000 mark for the
>first time in history and then fell back below 8000. Based upon prior
>price declines following peaks at or above thousand level
>psychological barriers in the DJIA, one should expect at least a
>thirty percent drop in stock prices over the next year or so.
>
>
> -The Dow Theory of Stock Price Movements-
>
> Based upon "Dow Theory", one can be a little more confident that
>the DJIA is currently entering a major bear market in the wake of the
>Dow's peak above the psychologically important 8000 mark. Dow Theory
>holds that, if the Dow Jones Industrial Average reaches an all-time
>high when other major market averages do not make all-time highs, then
>there is a "non-confirmation" and one should expect a major price
>decline and sell their stock holdings (the actual buy- and sell-signal
>is a little more involved then that, but "non-confirmations" are the
>key prerequisite for such signals). If, between 1897 and 1981, an
>investor had bought and sold the stocks in the DJIA with each Dow
>Theory buy signal and sell signal, respectively, then they would have
>achieved a return almost nineteen times that attained from simply
>buying and holding (see Martin Pring's 'Technical Analysis Explained'
>(1985), p.21).
>
> A textbook example of Dow Theory non-confirmations occurred when
>the DJIA peaked at 3000 in July of 1990. The Utilities reached an all-
>time high in 1988 and the Transports topped-out in August of 1989.
>With the record closing peak in the Industrials at 2999.75 in 1990,
>the Utilities and Transportation indexes were no where near new highs.
>Thus, soon after that a sell signal was registered that correctly
>anticipated a twenty percent decline in stock prices.
>
> With the recent all-time high reached in the DJIA above 8000,
>there was another non-confirmation indicating a future sell-signal.
>The Utilities last reached an all-time high in October of 1993. Thus,
>when the Industrials reached an all-time high last week above 8000,
>the record peak was not confirmed by a record high in the Utilities
>meaning that a Dow Theory sell-signal could occur which historically
>has been followed by a major decline in stock prices. (Notably, the
>peak in the Industrials WAS confirmed by a record high in the
>Transportation average, suggesting the final peak may still not have
>occurred.)
>
> -The Elliott Wave Principle of Stock Price Movements-
>
> The potential scale of a future decline in stock prices following
>the recent reveral from Dow 8000 and a Dow Theory non-confirmation can
>be predicted with the Elliott Wave Principle. The Elliott Wave
>Principle holds that stock prices move in repeating, fractal-based
>wave patterns. Based upon these patterns, Robert Prechter, the
>'Elliott Wave Theorist', predicted in the late-1970's and early-1980's
>that a major bull market in stocks was due that would carry the DJIA
>to a "Grand Supercycle" top which has been at least 200 years in the
>making. Following the final peak, Prechter warned the 'worst crash in
>U.S. history' would occur.
>
> Even though the bull market has lasted longer than Prechter
>expected and the DJIA has gone higher than first projected, the
>indication is that the final high has now been reached. One
>interpretation is that the huge Grand Supercycle rising wave pattern
>is completing with a final "fifth wave breakout" above a Supercycle
>upper channel line which has been marking key Elliott Wave tops in
>stock prices since 1937. This upper channel line, which was breached
>when the S&P climbed above 700 last year, can be seen on a logarithmic
>chart of the S&P by drawing a line through the key 1937 peak, the 1966
>peak and current highs in the S&P. As the Wave Principle predicts,
>this Supercycle upper channel is parallel a lower trendline that can
>be drawn through the 1942 low, the 1974 bottom and the 1982 low.
>
> One of the main reasons to believe the Grand Supercycle peak has
>been reached above the Supercycle upper channel line and Dow 8000 is
>because the current high point in stock prices is coinciding with a
>major planetary alignment. Each of the Elliott Wave turning points at
>the Supercycle upper and lower channel lines listed above, i.e., 1937,
>1942, 1966, 1974 and 1982, occurred around the time of rare planetary
>alignments. This pattern is repeating now as the current top is
>coinciding with another major planetary alignment.
>
> If, indeed, we are currently around the Grand Supercycle peak in
>stock prices above the Supercycle upper channel line and Dow 8000,
>then an historically unprecedented crash is near. Given the scale of
>the relevant wave patterns, this crash would be the opening phase of a
>bear market for stocks that could last upwards of a century and
>involve a 99% decline in the DJIA.
>
>
> -An Inefficient Market Hypothesis Test-
>
> All in all, the implication of historical price patterns in the
>stock market is that the worst crash and bear market in history is
>getting underway following the peak recently reached above Dow 8000.
>Based upon psychological barriers in the DJIA, a Dow Theory non-
>confirmation, the Elliott Wave Principle and astroharmonics, there is
>substantial reason to believe that a major, unprecedented decline in
>stock prices has just begun.
>
> If the expected decline occurs, then this will significantly
>falsify the Efficient Market Hypothesis and undermine reigning
>economic theory. Furthermore, the collapse will demonstrate the
>inefficiency of markets and how greed and competition result in the
>worst of all possible worlds in the long-run. Thus, faith in an
>imaginal invisible hand is a dangerous mistake.
>
> While the anticipated crash will upset the worldview of
>economists, it also implies an upset of prevailing popular opinions.
>Indeed, since general swings in stock prices reflect swings in mass
>mood between irrationally optimistic and pessimistic collective
>beliefs and expectations, the recent unprecedented peak likely
>involves the worst popular delusions imaginable. Indeed, one such
>delusion is that a "New World Order" of East/West peace, friendship
>and cooperation is at hand, when, in fact, there is substantial reason
>to expect a new world disorder and global war . While the approaching
>war will upset popular expectations and surprise the modern "secular"
>world, it shall fulfill biblical prophecy and thereby verify religious
>truth and the wisdom of faith in God.
>
>-> Send "subscribe snetnews " to majordomo@world.std.com
>-> Posted by: Stock Market Update <JPA94001@UConnVM.UConn.Edu>
>
>
>
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Paul Andrew Mitchell : Counselor at Law, federal witness
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