Virtually all stock market forecasting is based on the fallacy of linear extrapolation
By Elliott Wave International
Those who’ve invested solely in the stock market during the past several years have seen the value of their portfolios increase.
As of June 30, 2017, the average 401(k) balance stood at $97,700, according to Fortune magazine. That was a 9.6% increase from a year earlier. Average IRA balances were even higher at $100,200.
This is all well and good.
But, here’s a sample of the type of thinking that, ironically, could very well sink many a stock portfolio:
- ‘This bull market is only halfway through’ — CNBC, March 12, 2018
- [Market Veteran]: Why Stocks Will Keep On Cooking — Barron’s March 8, 2018
- Bull markets don’t die of old age… this one has more room to go, says market watcher — CNBC, March 7, 2018
This belief in the continuation of the trend is noteworthy, given the fact that the bull market has lasted for nine years, and no bull market in history has lasted longer than 10. Yet, at the same time, those headlines are not at all surprising.
Why not? Well, it boils down to two words: linear forecasting.
On March 7, 2018, EWI founder Robert Prechter elaborated:
Humans possess an ever-present, unconscious illusion that whatever trends and conditions currently in existence will persist. That illusion is the basis of all linear forecasting, which is to say virtually all forecasting. Elliotticians are different. We anticipate change.
A recent example is from our February 2018 Elliott Wave Financial Forecast. As you read the excerpt from the publication, keep in mind that a “throw-over” is a penetration of a trendline, which is confirmed by an immediate reversal back across that line:
Students of Elliott Wave Principle by Frost and Prechter will recall this observation anticipating what could happen at the end of Supercycle wave (V): “If there is a throw-over, the ensuing reaction could be breathtakingly fast.” Neither the experts nor the investing public is making any allowance for this potential.
Keep in mind that this statement was made as of the close on February 1. As you can tell on the chart below [wave labels available to subscribers], which is from our March 2018 Financial Forecast, the Dow Jones Industrial Average plunged 11% over the next six trading days. The “throw-over” had indeed been confirmed.
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