Robert Prechter, the stock market guru who rose to fame with his prescient prediction of a bull market for the 1980s, isn't so bullish now.
He bases his forecasts on technical analysis known as Elliott Wave theory.
"If the cycle is still operating, the stock market is at high risk of a sharp collapse," Prechter told MarketWatch.
"Near-term, we’re prepared to see the Dow [Jones Industrial Average] make one more high. But it doesn’t have to happen."
The Dow has nearly tripled since March 2009 and last touched an all-time peak May 19. It closed at 17,764 Tuesday.
Elliott Wave theory posits that financial markets go through a trend in five waves, and retrace in three waves. Prechter is president of Elliott Wave International. So what are the problems in his eyes?
- Market sentiment, a contrarian indicator, has been extremely optimistic for more than two years.
- The number of stocks and indices rising in recent months has shown a "dramatic lessening."
Meanwhile, Federal Reserve Chair Janet Yellen judged last month that stock prices are "quite high," but given the weak track record of Fed officials when it comes to foreseeing market moves, don't expect stocks to drop, says Eric Nelson of Servo Wealth Management.
For example, former Fed Chairman Alan Greenspan said in December 1996 that the stock market may have been suffering from "irrational exuberance," Nelson notes in a commentary. But stocks kept rising for another three-plus years.
"The fact is, stocks go up and down, but our ability to forecast market movements with any sort of short-term accuracy is terrible," Nelson writes.
"Even when really smart or well-informed investors or politicians have a point-of-view, it is no more likely to be correct than anyone else’s — which is to say completely random."
So instead of basing your investment decisions on market forecasts, "you are better off building a diversified portfolio that matches your long-term goals that you can stick with through the ups and downs," Nelson recommends.
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