PARALLELS WITH 1994 - 4/2

INEFFICIENT MARKET HYPOTHESIS - 3/31

The DJIA rose almost 180 points today to just below the 7000 mark. This certainly seems to indicate an Elliott Wave "wave-(3)" crash into the Fibonacci 55th day after the March 11th top, i.e., May 5th, is not going to occur. Nevertheless, what does appear possible is that, following a retest of the psychologically important 7000 mark in the DJIA, a wave-(3) collapse, maybe some sort 1962-style May panic, will take place. What is most interesting about this possibility is that the approaching panic could be precipitated by a negative shock, i.e., an upsetting international event or events that leads investors to rapidly become pessimistic and sell stocks in a wave of mass fear.

As I have pointed out in the past, when the DJIA reaches round-number thousand marks in the widely followed DJIA, quite often stock prices reverse course and fall significantly- usually in association with negative historical developments that upset collective expectations and precipitate selling on Wall Street.

For instance, when the DJIA reversed from the "Magic 1000" mark five times between the mid-1960's and early-1980's, each reversal, which involved a bear market decline of more than 30% on average, was associated with an upset of investors' expectations caused by such negative historical developments as the Vietnam War, Watergate, OPEC oil embargoes and severe economic recessions (see CHART).

Likewise, when the DJIA reversed from 3000 in July of 1990 (closing high of 2999.75 on two consecutive days- July 16th and 17th), the subsequent 20% correction in stock prices was "caused" by Iraq's invasion of Kuwait, the crisis in the Persian Gulf and an oil-shock (see CHART).

In 1994, just after the DJIA reversed from the 4000 mark in late- January, the Fed hiked interest rates and stock prices dropped 10% and held below the 4000 mark for a year-or-so (see CHART).

This year the pychological barrier phenomenon in the DJIA appears to be repeating once again. Just after the DJIA reversed from the 7000 mark in March, the Fed again raised interest rates for the first time since 1994. This unexpected negative macroeconomic event has again upset investor expectations and precipitated selling. As in '94, the hike in interest rates has thus far precipitated a 10% drop in the DJIA.

There is reason, however, to suspect that the implication of a reversal from Dow 7000 is going to be much more severe than what has thus far occurred.

The solar eclipse March 11th peak in the DJIA above 7000 may have been an Elliott Wave Grand Supercycle peak of unprecedented historical proportions. If so, the largest cyclical decline in stock prices ever should be getting underway. Furthermore, with the DJIA's drop to 6400 into mid-April and rise back to 7000 at the current juncture, it appears that an initial "wave-(1)" down and "wave-(2)" up has developed. In Elliott Wave terms, this means that wave-(3) down is now imminent- the crash wave; in this case, the potential Grand Supercycle crash wave. (See CHART)

What is interesting right now is that the DJIA and S&P500 are right at psychological barriers from which one could expect a shock reversal (the DJIA print high today was 6998.15 and the S&P500 futures closed at 799.80). In other words, in entering a wave-(3) crash here, some sort of negative international event(s) might occur that dramatically upsets investors expectations, leads the DJIA and S&P500 to reverse from the psychologically important 7000 and 800 marks respectively, and causes a wave-(3) Grand Supercycle crash sell-off.

What could do this? There is no way to know for sure, but a couple of possibilities right now given what's recently been in the headlines are the following:

* North Korea, seemingly on the edge of a famine, unleashes a surprise attack against South Korea precipitating a military crisis in East Asia and a major East/West confrontation.

* War erupts in the Middle East (there are all kinds of ways this could occur, but keep in mind my vision of a chemical SCUD missile attack on Israel- see "The Truth".)

* A catastrophic natural disaster like the so-called "Big One" (earthquake) in Southern California or Tokyo or maybe a major eruption of the volcano beside Mexico City.

The latter possibility shows just how potentially "exogenous" and "random" an expected shock could be at this point. Of course, the fact that one can expect such a shock at this point based upon patterns in stock prices demonstrates just how mistaken the idea is that random, external forces shape the course of human history. The seeming implication of this psychological barrier phenomenon in the DJIA is that everything is interconnected, interdependent and part of a greater, underlying orderliness.