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Does An Old Theory Predict 2018 Will Be A Stock Market Top?

Jul. 08, 2020 1:53 PM ET
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  • This is an excerpt I wrote on January 25, 2018.
  • Sammuel Benner's theory holds true to today.
  • A major market low is predicted for 2021. Is it a year late?

With 2017 wrapped up and handily one of the stock market's best years ever, what should investors expect for 2018? While I don't want to make any finite calls to take to the bank, I am writing this article because I remember reading an Elliot Wave Theory book 5 years ago and something in the Time Sequence/Ratio Analysis section stuck out. It's called Benner's Theory, and it dates back to Samuel Benner's career in the later part of the 1800s. He noticed that the highs of business tend to follow a repeating 8-9-10 year pattern, while serious and less-serious lows tend to follow a 16-18-20 year pattern. Naturally, I immediately plotted out the pattern years to the present and near future and I couldn't help but get excited to see if the next prediction comes true. Especially because the anecdotes I read were written before 1987 and all of their analysis led to 1987 being a panic low year. Here are the years starting with 1929 being an obvious market high:

Peaks: 1929 - 1937 - 1946 - 1956 - 1964 - 1973 - 1983 - 1991 - 2000 - 2010 - 2018

Minor Lows: 1941 - 1957 - 1975 - 1995 - 2011 - 2029

Major Lows: 1933 - 1949 - 1967 - 1987 - 2003 - 2021

Clearly, there are several highs and lows not accounted for (2007/2009 being the most recent) and the 1990's appearing inaccurate, but I think it's important to note that if Benner was able to recognize this pattern 140 years ago and it's still 90% accurate, then it's worth noting. Also, I could have started with the wrong count number or give or take +/- 1 year to any outcome given the length of time. Another thing to notice is that the peaks don't necessarily mean a major peak. 1929 and 2010 were very different in terms of being a major and minor top. So if this pattern ends up being correct - will 2018 be a major or minor peak? I'd lean toward major based on current sentiment, but also because a major low is signaled for 2021 - a 3-year decline would definitely be a major top.

There are a few red flags that I'm keeping an eye on this year. First, if you value EWT, most practitioners would agree that we are currently in the 5th wave of a bull market cycle (not to be confused with a secular bull market cycle). Second, many psychological bull market top warnings are flashing. Don't you find it crazy how 99% of people who threw money at bitcoin have no idea what bitcoin really is or why it might be valuable? Do you find it absurd that stocks can double or triple in value in *1* day because management says in a news conference they are interested in using blockchain technology? Even without bitcoin or blockchain news, some charts are looking a bit parabolic - including the major averages! NFLX, BA, CAT, ABMD, TREE, etc. Complacency regarding risk is very high.

Lastly, the public bears seem to be throwing in the towel. Not only is this rally gaining steam in the U.S., but the entire world has gone madly bullish. Forecasters at every major bank appear optimistic about the global economy and some analysts have gone as far to say that the new U.S. tax cuts have "changed the game". THE GAME NEVER CHANGES. 2017 seemed like a grueling, steady grind higher up the wall of worry, and there's only so long analysts on the wrong side of the market can stay pessimistic before losing credibility. Credibility is a loose word these days though, because apparently virtual currency that 99% of it's investors know nothing about has been defined as credible. I think this crypto-sensation is fueled a lot by the public's FOMO (fear of missing out) and the fact that any small amount of money can move it's market.

*My thoughts on crypto-currencies: Bitcoin is worthless... but blockchain has the potential to improve many businesses, therefore blockchain is valuable. Bitcoin's fluctuations make it impossible to be a form of legitimate currency. Governments can use blockchain to make their own currencies into crypto-currency, if they feel crypto-currency is better than physical currency. Bitcoin and alt-coins are worth what someone is willing to pay for them, but you can't use them to buy anything valuable (at the moment). For now it is just a speculative asset with no real tangible value. Trade it, don't invest in it."

Meanwhile, this is is all happening as interest rates rise - typically a negative thing for stocks. So what will 2018 bring? Definitely volatility. Whether the indexes finish higher on the year or not (I think they'll finish higher), we shouldn't have as steady a year like 2017. I think so because of interest rates increasing and that almost all commodities are trending up, most notably, gold. Gold is greatly affected by currency fluctuations but is also the classic safe haven for when stocks turn sour. It'd be rare to see gold, interest rates and stocks move in lockstep up. 2018 is not the year to do your long term retirement buying. What concerns me most is the major average's rate of ascent. The only other years where I can see the market with a similar level of acceleration were 1928 and 1986, maybe 1997. There were major market peaks in the years that followed. I've been waiting 5 years to see if 2018 will indeed be a market top (minor or major) but I'll need to see more technical evidence before confirming this theory.

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