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One of the nice things about the Wave Principle is that in addition to explaining what’s happening in the financial markets, it always does within the context of what most people think is happening in the financial markets.  A great example is this forecast from the July 26 issue of The Elliott Wave Theorist:
An elaborate direct-mail advertisement that reached my mailbox on July 13 (the day before the latest oil peak) spends the equivalent of 24 pages to convince its readers that a soaring oil price is “In-ev-i-ta-ble.” One should pause, though, when the writer admits, “How did we NOT see this coming?” If someone didn’t see it coming, should we rely on him to see it going? A setback of at least Primary degree, if not a multi-year bear market, is due now. The danger of holding oil investments at this time far outweighs the potential reward. Stay away from the long side.

The fervent belief in ever-upward crude oil prices was a key tip-off to the 27% decline since its high. The rising belief that oil prices are fixed, is another socionomic clue to the larger trend in social mood. As The Elliott Wave Financial Forecast explained in April, 2003 when the initial bear market of early 2000-2003 was near its low (see Additional References below), theories about market manipulation are representative of a bearish collective mindset. Representative Hastert’s effort to ingratiate himself with voters by associating with price declines is another subtle sign of how unprepared the public is for the oncoming economic environment. As readers are well aware, oil’s spill is just an early manifestation of unfolding economic forces to which no self-respecting politician is going to want to be connected.  

April 2003, EWFF
One of the psychological aspects of a bear market is investors’ costly tendency to reject falling equity prices as evidence of a trend change, no matter how dramatically or insistently the market places them before their eyes. A watchful subscriber submitted the following example from a column in his local paper:
“Oddly, as an investor, I find myself unexpectedly calm. Call it fatalism if you like, but I feel I don’t have to agonize over any big decisions, as there doesn’t seem to be anything I can do. Whatever will happen will happen.”

A bear market is a series of hard choices brought on by an initial belief that there is no choice. In fact, all this person has to do to avoid financial devastation is to make a simple phone call. Like many investors, this columnist is obviously still caught in this first phase. Eventually, it gives way to an equally irrational secondary reaction, “I’ve been robbed.” At this point, much of the initial serenity is lost. There is evidence that this moment is approaching for many investors. In a series of e-mails to our office and in news articles, we are hearing more and more about, “‘surprising’ swings that suggest the markets may be rigged.” The (London) Evening Standard recently delivered word of a “secret” committee whose mission it is to stabilize stock prices. In a strange contradiction, however, the article went on to state that the existence of the U.S. government’s “plunge protection team” was revealed by the Washington Post more than 5 years ago. If it is unknown to most people, it is only because nobody believed in or cared about market manipulation when stocks were going up. In a bull market, investors want all the credit for their gains. In a bear market, they want losses to be the object of forces that are beyond their control.

Long-time subscribers will recall that Elliott Wave International has always rejected the notion of conspiracies that control market prices (for EWT’s response to the initiation of the “plunge protection team,” see the May 1997 and October 1998 issues and pages 365-370 of The Wave Principle of Human Social Behavior). What interests us now is not the concern itself but its timing. History suggests that the onset or abandonment of a shared concern may be an important signal. Here’s a quote from the October 1985 issue of The Elliott Wave Theorist marking the point when similar worries about the integrity of the market were about to be dissipated by the bull market:
“I recently received a letter from a subscriber who quit investing in the market, saying, ‘the odds of figuring out the direction of the market have changed drastically since these institutional programs have begun to dominate the market. The Business Week issue of September 16 finally convinced me I have no chance.’ I think the poor guy was done a disservice by those who blame their difficulties on manipulation and conspiracies. Once the market turns up again, you probably won’t hear any more about it.”

This forecast turned out to be accurate. Except for some brief rumblings in the wake of the 1987 crash, the fears of market manipulation disappeared for the remainder of the bull market.

Of course, just because people are paranoid about government manipulation doesn’t mean that the government won’t try it. As EWT has explained before, however, the market and social mood are too big to be pushed around for any significant duration. The extent to which the government tries manipulation is the extent to which it will accelerate deflation’s destruction of U.S. taxpayers’ and depositors’ money. How successfully has the Fed stopped the 75% NASDAQ decline and the 50% S&P decline? Just the belief in the existence of plunge protectors plays right into the psychology of the decline. As EWT explained in 1998, “Hope-filled bulls will hold on for the slaughter and irresolute bears will give up their positions.” In the earlier quote, notice that it was the other way around in 1985: the evil institutions were driving the little guy out. This is more evidence that there really is an all-powerful force conspiring against the average investor. It’s his own participation in the collective mood.