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Stock Market Bull Market: Real Or Phony?

Bull Market Skeleton

February 27, 2012 - Stock Market Bull Market: Real or Phony? - By Elliott Wave International

On February 24, the S&P 500 soared to its highest level in nearly four years after breaking through its long-standing April 29, 2011, peak. And, according to the mainstream experts, there is just one word to describe the S&P's long-term future: "Ole!"

Here, the recent slew of news items illustrates how the purlieu of Wall Street has truly become the plaza de toros:

"Be 100% In Equities" (Bloomberg)

"Basically everything is in a new bull market right now. It's time to buy." (Associated Press)

And: "Despite all the gloom and doom still lingering from the financial crisis, the view through the rearview mirror shows bullish images of a US stock market on the move." (Market Watch)

So, are the bulls right?

Well, in his latest monthly Elliott Wave Theorist and Financial Forecast, EWI president and veteran market analyst Robert Prechter pulls one of his favorite indicators off the shelf -- US stocks priced in gold -- to see how the rally stacks up against this "gold standard."

Here's how it works: US stocks (the DJIA, S&P 500 and other stock indexes) are measured in nominal terms -- i.e., in US dollars. What Prechter calls "the real Dow" are stocks priced in gold.

Now, you might ask yourself: Gold hasn't been the standard since FDR gave nightly "fireside" chats and the average cost of gasoline was 10 cents/gallon (circa 1933). So, what does it matter where the S&P 500 is denominated on this outdated scale?

Here's why it matters: Over the past 30 years, an authentic bull market has occurred ONLY when the "real" S&P 500 has risen alongside the nominal S&P 500. In the new Elliott Wave Theorist, Bob shows you the following chart of both the nominal and the "real" S&P 500 for 2000-2007.

SP500 Comapared To Gold

As you can see, the major divergence between the nominal and the "real" S&P 500 began in 2002, when the nominal S&P 500 broke away from the "real" S&P 500 and started to rally -- while the "real" S&P did the opposite. As Prechter explains, the 2002-2007 advance in the nominal S&P 500 was

" . . . not due to a swelling desire to own equities, but simply repricing stocks in depreciating dollars. The bounce in real-money terms ended in [2002]."

You may ask, what about the 3-year long rally we've seen since 2009?

Well, in the new Elliott Wave Theorist, Prechter shows you a 2nd chart of the S&P 500 versus the S&P/gold over the past 3 years.

In that 2nd S&P 500 chart, you can see clearly whether the stock market rally of the past 3 years has the makings of a "real" bull market.

You can see all of Prechter's latest charts and analysis 100% risk-free now, instantly. Click here to begin.

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