Known for their bearish outlook and their forecast for deflation, co-editors Pete Kendall and Steve Hochberg in The Elliott Wave Financial Forecast suggest, "Throughout the first half of the year, we have observed the succession of credit events setting up the greatest credit crisis in history,"
The advisors notes, "A wellspring of credit drives every bubble. The beginning of the end for the credit boom occurs upon a tightening of credit. An intensifying thirst for cash will dry up the well of credit that fed the global markes over the last few years. As it dries up, the seemingly endless succession of market manias will end, also."
The expansion of credit, they contend, lifted virtually all asset prices, and, they say, its contraction will now guide them lower, much to the dismay of those seeking refuge in supposed safe havens.
Meanwhile, Hochberg and Kendall add, "The big news in the bond market is the credit spread explosion, which remains the bedrock of our bond forecast. The steep widening that occurred in July should be the beginning of a historic move. When it ends, junk bonds will have disappeared from the investment landscape."
They continue, "Our forecast has called for a synchronized decline in nearly every asset class but the dollar. Our long-standing theme is that the credit expansion has lifted nearly every financial asset class, resulting in a rarely seen positive correlation among disparate markets. The flip side is that when credit contracts, all of these markets will more or less decline together."
The transition from the Great Asset Mania to the Great Credit Contraction, they suggest, is confirmed by a turn down in the major stock indexes. Indeed, they believe that "the great decline" has begun following the market's high in July.
Near-term, they see a counter-trend move. They explains, "A relief rally well may be starting, but it should hold well beneath the July highs and lead to greater selling pressure. If the index declines strongly through 12,700, odds would increase that another leg down was already underway. The key point is that the market's main trend is down and that's the direction we should continue to concentrate on."
The NASDAQ, they note, is in a similar position to the blue chips. They suggest, "It's not entirely clear how long the current bounce will last. Coming under last week's 2386 low would shatter the support line and indicate that the next leg down was already underway. Until then, we'll give the upside some leeway."
As noted, they also expect metals to decline. They explain, "Gold and silver remain in their respective stair-step declines with gold heading below $500 and silver declining below $9." The only asset with strong upside potential, they contend, is the U.S. dollar. They conclude with this contrarian view: After a test of the December 2004 low, the U.S. dollar index has turned higher. Price should be at the forefront of a multi-month rally."
Each day, Steven Halpern's TheStockAdvisors.com features the latest investment ideas and market commentary from the financial newsletter community.
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