Another Bull Goes Bearish

Another Bull Goes Over To The Bears
Peter Eliades Now Says Dow Could Drop Below 9,000

By Peter Brimelow, Marketwatch | 13 September 2008

NEW YORK (MarketWatch)— Very few letters are making money in 2008. And one of them has just turned bearish.

The year has been a grim grind, for investors and for investment letters alike. As of the end of August, just 19 letters of some 180 followed by the Hulbert Financial Digest had made money in 2008. Even the ultraconservative Growth Stock Outlook, which has finished in the black every year for more than two decades, is slightly (0.8%) under water YTD (but don't count it out yet). See June 5 column.

Let's look on the bright side— except that it's dark. Year to date, Peter Eliades' Stockmarket Cycles is up 13.0% by Hulbert Financial Digest count, vs. about negative 10% for the dividend-reinvested Dow Jones Wilshire 5000. That's the second-best performance, after Forbes Special Situation Survey. See Aug. 18 column. Over the past three years, Stockmarket Cycles has achieved a 4.53% annualized gain, slightly (10.1%) above the 4.16% annualized gain of the total return DJ-Wilshire 5000.

But over the past 10 years, Stockmarket Cycles has significantly underperformed the market according to Hulbert, gaining 1.81% annualized vs. some 5.66% annualized for the total return DJW. It's one of those letters that has odd periodic streaks of success— what Mark Hulbert calls a "hot hand." It's irritating to statisticians, but can be deeply interesting to investors, if they're in at the beginning. See Aug. 4 column. And, arguably, editor Eliades' hand is hot right now.

Eliades' methods are equally irritating to statisticians. He claims to distinguish multiple patterns of cycles in the stock market, complex overlapping rhythms of the sort that naturally appeal to the professional musician he once was. In his monthly letter dated Sept. 5, however, Eliades argues that simple technical analysis explains the situation:

The Dow has still been unable to regain the important resistance of 11,750 which was registered as an all-time high in January 2000. After that resistance was first overcome in October 2006, the Dow remained well above that level for another year. In March and July of this year the Dow moved back down to the area of 11,750 and held those levels successfully. In July, however, that level was easily pierced as the Dow moved down to a print low of 10,828 on July 15. In the rally that has ensued from that bottom the Dow has approached that level twice. It closed slightly above it for one day on Aug. 11, and yesterday it approached that level once again with a high of 11,715 and found the air too light to breathe. It ended the day today 200 points below that important resistance level at 11,750. On the following trading day, the day after the Labor Day holiday, the Dow made a final stab at surpassing the 11,750 resistance. It reached a print high that day of 11,790.17. Over the subsequent 20 trading hours after that final test of 11,750, the Dow fell over 750 points and began what we believe will be a very significant decline. Is it possible to see yet another test of that resistance level? Nothing categorically rules it out, of course, but after each failure the odds grow that the subsequent decline will be significant."

Eliades says his "preliminary projection" for the Dow Jones Industrial Average is a decline to at least 8,847, and to 918 - 976 on the S&P 500. More recently, he commented: "The Dow would have to move below 10,790 at some time this week in order to confirm nominal four-year downside projections." But Wednesday he had his mutual fund switchers buy a leveraged bearish play: Rydex Dynamic: Tm 500 (RYTPX).

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Normxxx    
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