|This essay by Robert R. Prechter, Jr. originally appeared in The Elliott Wave Theorist in January 2005.|
Part I of this study (available here) covered the Wave Principle’s record in calling the six Major turning points in the stock market from 1937 to the present. This issue describes the bases for judging the record for the 15 intermediate turning points for the same period. For definitions of each type of market turn, a quantitative analytical summary, and a complete list of original source material, please see Part I. Bold type within quoted sections indicates emphasis added.
Intermediate a: March 1938 Bottom, R.N. Elliott (Implied Bullish)
Elliott’s first book, published in August 1938, stated, “…97.46 of March 31 was the bottom of wave A of the bear market.” As the decline from March 1937 to March 1938 was a clear five waves, we may presume that Elliott was bullish near the bottom, but there is no proof of that fact.
Intermediate b: November 1938/September 1939/April 1946 Top, R.N. Elliott (Bearish)
The peak price for wave occurred in November 1938, but the “orthodox” (pattern) top occurred in September 1939, a single Dow point from a new high. The Dow held near that level through April 1940. While Elliott’s outlook during 1939 is not very clear, his graph from April 8, 1940 (see Figure 19) unequivocally calls for a big decline, as you can see by the labels (1) and (2), clearly implying a wave (3) collapse directly ahead.23 The market crashed in May coincident with news of war in Europe.
R.N. Elliott, September 1939
Intermediate c: May 1946 Top, R.N. Elliott (Bearish)
In Nature’s Law, published in 1946, Elliott published a review of “the 1942-1945 bull market” along with the graph shown here as Figure 19. He wrote, “On going to press, an irregular top, wave B, is in process of formation. This should be followed by wave C.”
The graph implies a bear market into the range of wave , which is 125-145, except that Elliott remarked, “I expect a sub-normal bear market,” which is exactly what occurred. The final bottom occurred at 160 in June 1949.
R.N. Elliott, May 1946
Intermediate d: June 1949 Bottom, R.N. Elliott (Implied Bullish)
In 1946, Elliott remarked, “I expect a sub-normal bear market as illustrated in Figure 76 [Figure 20], Chapter 12.” Figure 19 and the actual market are shown together here so that you can see the shallow setback he expected alongside what subsequently occurred.
After Elliott’s death in January 1948, Garfield Drew in his 1948 book, New Methods for Profit in the Stock Market, reported on Elliott’s opinion as reiterated by his “colleague,” stock broker John C. Sinclair, who confirmed Elliott’s outlook for a shallow bear market and then a long advance to new all-time highs.24
Figure 76 from Nature’s Law
Update: September 1953, A. Hamilton Bolton (Bullish)
In Bolton’s first publication on the Wave Principle, he outlined the subdivisions of wave III, past and future:
First Quarter, 1953
The late R.N. Elliott in 1941 projected a pattern of future stock market behavior which has not varied in fundamentals from his original outline years ago. This last prediction, or hypothesis, is vitally important, because if Elliott is right, we will not see again probably in this century stock prices as low “in dollar price” as they were in 1942. Of course, inflation will take care of a great deal of that hypothesis anyway, but it does mean that no major depression of the 1929-32 variety is in the cards in our lifetime (although there may well be 1921s, 1896s, 1873s again within this span). Further, it is as well to keep the background in perspective; Elliott’s projection was made at a time when deflation and not inflation was the current fear.
The significance of Elliott’s projection should now become more apparent.
(1) Elliott’s hypothesis calls for a series of bull markets from 1942 similar in degree to those between 1857 and 1929, in the pattern of 5 waves (3 up and 2 down in between), followed by 3 down (2 down and 1 up), all moving on to successively higher levels.
(2) Wave of the first Cycle bull market was completed in 1946 (Elliott’s analysis [before his] death in 194), and its correction (wave 2) was completed in June 1949.
(3) Because of both the time element (a third wave according to Elliott is never shorter in time than the first wave) and amplitude indicated, we must now still be in wave of the 1942-? bull market (one Cycle wave).
(4) Following completion of wave (not likely before 1954 because of time and amplitude elements), there should be a correction (wave ) on the order of 1946-49, which, however, should not break the base line of the 1942-1949 lows, according to one of Elliott’s tenets. (This is a normal expectation only and might in an extreme case be violated slightly.)
(5) Following wave , wave should close out the first upward Cycle from 1942. Because of the time element again, it looks like the 1960s before we face a correction to the whole rise from 1942 and anything approaching a major depression in stock prices.25
The dashed line in Bolton’s graph called for the top of wave near Dow 1000 by 1965. In 1957, he added, “The power-house that will be building up if the market consolidates for another year or so along orthodox lines, it seems to us, will offer the probability that Primary 26 could be quite sensational, taking the DJIA to 1000 or more in a wave of great speculation.” The Dow peaked at 995.14 in February 1966 and closed no higher than 1052 over the ensuing 16 years.
Hamilton Bolton, 1953
Intermediate e: November 1961 Top, A. Hamilton Bolton (Incorrect by a Nose)
In 1960, as the stock market was moving irregularly downward, Bolton refined one of the most accurate stock market predictions of all time. Applying Fibonacci price multiples to the market’s waves, he wrote, “Should the 1949 market to date adhere to this formula, then the advance from 1949 to 1956 (361 points in the DJIA) should be complete when 583 points (161.8% of the 361 points) have been added to the 1957 low of 416, or a total of 999 DJIA.”27 This was a perfect call not only for a continuation of the bull market but also for the level of its ultimate top. The daily closing high for the Dow in February 1966 was 995.14. (It reached about 998 intraday.) From that point, the stock market experienced its largest bear market since 1937-1942, which is exactly what WP required for the anticipated wave IV.
At the same time, Bolton understood what was ultimately the correct interpretation of the stock market’s position as shown in Figure 23, from 1960, when the market was due for an interim setback for wave . But Bolton’s preferred labeling28 in 1961 indicated a fifth wave in force when in fact it was wave (B) of .
Bolton was still bullish in early 1961 but anticipated a crash as early as the following year, saying, “This should be a period of great activity and speculation, and may well be followed by an important market crash. There seems very little likelihood of this arriving, however, before the period mid-1962 to mid-1963.” In April 1962, he was still bullish but added, “…we cannot entirely throw out the possibility that Figure 51 [showing wave B in force29 ] could be correct. The key at this point is whether the basic long-term trend line from 1949 will be decisively broken on the downside in 1962.” This, in effect, was Bolton’s “stop” on his opinion, which was triggered a couple of weeks later at a comfortably high level. Despite a sensible stop, Bolton’s preferred wave interpretation and outlook were wrong, so this market call is rated “incorrect.”30
Hamilton Bolton, 1960
Intermediate f: June/October 1962 Bottom, A.J. Frost (Bullish)
Bolton was in Athens, Greece, in late 1962. Frost, who had joined Bolton’s firm in 1960, received a phone call from Bolton at the time of the Cuban missile crisis. Frost took that opportunity to provide his view of the market. As he recalled in his memoirs, “With only a cursory knowledge of the Wave Principle, then, I caught the Cuban crisis low to within two hours. The Cuban crisis low was so obvious that Bolton expressed regret at leaving the country, as he was sure he would have caught it. That experience confirmed my faith in Elliott, and I continued to keep an hourly chart for the next twenty years.”31
In December, Frost wrote a report on the stock market in which he reiterated his and (by then) Bolton’s opinion that wave had ended in October. He included the following diagram (Figure 24), accurately depicting the four waves upward from the 1942 low and forecasting the fifth. He also included a copy of his hourly chart (Figure 25) labeling the waves into the October 1962 low.32
Intermediate g: October 1966 Bottom (N/A)
No Elliottician published an Elliott wave opinion on the stock market between May 1966 and March 1967.
Intermediate h: December 1968 Top, A.J. Frost (Bearish)
In June 1968, Frost wrote:
Considerably more to come on the downside between now and 1970. Probably a bear slide at least equal to the 1966 decline of 256 points. …The current up wave is expected to exhaust itself below 1000 DJIA. …The low of the market should form below the 740 DJIA level…. Based on mathematical projection and pattern analysis, a target date of 1970 is indicated the bottom of the bear market correction….33
The advance did “exhaust itself below 1000,” peaking at 985.21 six months later. The next decline did carry “below the 740 DJIA level” on the “target date of 1970,” bottoming in May 1970 at 631. That low, however, was not the end of the bear market, which included another advance into January 1973 and then a final wave down.
Intermediate i: May 1970 Bottom, A.J. Frost (Incorrect but with an Accurate Forecast)
Frost published again in May 1970 and accurately predicted the price of the DJIA at its ultimate bottom. Here is what he said:
A. Hamilton Bolton in May 1960 said, “Should the 1949 market to date adhere to the Fibonacci formula, then the advance from 1949 to 1956 (361 points in the DJIA) should be complete when 583 points (161.8% of the 361 points) have been added to the 1957 low of 416, or to a total of 999 DJIA.” This forecast was made almost six years before the great bull market peaked at approximately 1000 DJIA. Applying the same formula to determine the extent of the current bear market, we get a number of possibilities, each indicating that a severe market lies directly ahead. A drop of 61.8% from the recorded high of 1000 DJIA would bring the Dow back to 381, its 1929 high. This doesn’t seem probable, [as] the current Cycle wave from 1966 should not overlap the 1929 high. Should the current C-wave from December 2, 1968 (DJIA 986) drop 414 points (161.8% of the 1966 A-wave decline of 256 points), the market would bottom out at 572. [See Figure 26.]34
The low of the bear market occurred on December 9, 1974 with a daily close of 577.60 and a low hourly reading of 572.20. It looks like a perfect call except that Frost had thought that the market was on its way to fulfilling that target by the fall of 1970, while in fact it was days from its low for the year. Most Elliotticians would have had the same opinion. Instead of tracing out an A-B-C pattern, however, the Dow did not reach the 572 target until completing a less common A-B-C-D-E expanding triangle. Therefore this otherwise perfect call is being rated for this study as an incorrect forecast for the 1970 low, as Frost was bearish at the time. Due to conflicts with one of the principals of Bolton-Tremblay (Bolton having died in 1966), Frost did not author another Elliott Wave Supplement for the firm.
A.J. Frost, May 1970
Intermediate j: January 1973 Top, Richard Russell (Bearish)
Russell was bearish at the 1973 high and asserted that the bear market dating from 1966 was not over. The following graph (Figure 27), which he published in July 1973, accurately outlined the rest of the bear market.
Richard Russell, July 1973
Russell continually updated this chart as the market progressed. On November 9, 1973, right after the explosive rally of October and with most analysts still bullish on the “nifty fifty” growth stocks, he showed the Dow having just peaked in wave 2 of C (see Figure 10 in Part I) and made this forecast:
According to my interpretation of Elliott, we remain in a primary bear market situation. The bear market could end around late-1974 or 1975 with the Dow down below 700 and the majority of common stocks (as measured by the Value Line Industrial Average) at frighteningly new lows.35
At the bottom in December 1974, Russell turned bullish, per the forecast in Figure 28. (See discussion in Part I under “Major 4.”)
Intermediate k: September/December 1976 Top, Robert Prechter (Bearish)
In Elliott Wave Reports for Merrill Lynch, Prechter plotted the waves of 1976 as an expanding triangle so he was near-term bearish at the September high and then turned bullish at the November low. The final advance of the year peaked on December 31, 1976 in a rare “truncation,” in which wave did not make a new high. Despite this unusual development, Prechter’s analysis published in February 1977 labeled a year-long advance as having ended, as shown in Figures 29 and 30.36
Robert Prechter, February 1977
Intermediate l: March 1978 Low, Robert Prechter (Bullish)
In March 1978, Prechter applied Fibonacci relationships to identify the bottom of a 14-month decline at 740. Following are his graphs (Figures 30-32) and an excerpt from that Elliott Wave Report:
[T]he 740 area marks the point at which the 1977-78 correction, in terms of Dow points, is exactly .618 times the length of the entire bull market rise from 1974 to 1976. Mathematically we can state that 1022 – (1022-572).618 = 744 (or using the orthodox high on December 31st, 1005 – (1005-572).618 = 737). Second, the 740 area marks the point at which the 1977-78 correction is exactly 2.618 times the length of the preceding correction in 1975 from July to October, so that 1005 – (885-784)2.618 = 742. Third, in relating the target to the internal components of the decline, we find that the length of wave C = 2.618 times the length of wave A if wave C bottoms at 746. Even the wave factors as researched in the April 1977 report mark 740 as a likely level for a turn. At this juncture then, the wave count is compelling, the market appears to be stabilizing, and the last acceptable Fibonacci target level under the Cycle dimension bull market thesis has been reached at 740.30 on March 1st. It is at such times that the market, in Elliott terms, must “make it or break it.”37
Robert Prechter, March 1978
Intermediate m: April 1981 Top, Robert Prechter (Incorrect)
Prechter was so bullish on the larger trend that he did not expect the setback that occurred from April 1981 to August 1982. The form of the setback, however, made him even more bullish on the upside potential for wave V, and he raised the expected extent of wave V by over 1000 points. (See discussion in Part I under “Major 5.”)
Intermediate n: August 1987 Top, Robert Prechter (Bearish)
Prechter was not yet bearish at the August 1987 peak, but he quickly recognized that the peak of wave had passed and waited for the right time to exit the market. After the close of Friday, October 2, at the end of a two-week rally to fewer than 100 points below the August high, he issued his first bearish outlook at Primary degree since the 1976 top of wave . Here is the front page table from that issue, which correctly called for a decline in Primary wave :
The Dow closed unchanged on Monday, October 5, the day of publication, and then fell 900 points in two weeks.
Intermediate o: October 1987 Bottom, Robert Prechter (Incorrect)
On October 15, 1987, Prechter wrote, “[The] 2-week cycle is due to bottom October 19-20 (Monday-Tuesday)….”38 The daily closing low for the crash occurred on Monday, October 19, and the intraday low occurred on the morning of Tuesday, October 20. Unfortunately, Prechter saw that low only as a temporary bottom and at best as the low of wave A of a new bear market. Although he allowed for a new all-time high in wave B, he was more bearish than bullish from that time forward. His error stemmed from having considered the low of wave IV better placed in 1982 rather than 1974, from the depth and speed of the 1987 crash, which was unprecedented in a decline of Primary degree, and from his long-standing expectation that a market peak would occur in 1987.39
Intermediate p: October 2002 Bottom, Robert Prechter (Incorrect)
During the first wave of the bear market, Prechter correctly called for the low of September 2001 in a report issued the night after the 9/11 attacks and then correctly called the high of March 2002, after which the market plummeted for seven months. He did not, however, turn bullish at the October 2002 low. Nor, he contends, would any Elliottician properly applying WP have done so. The decline from 2000 to 2002 took either a complex and misshapen correction or, as Prechter proposes, a form that R.N. Elliott never described, an expanding wedge, a counterpart to the expanding diagonal triangle. Prechter has tentatively added this form to the catalog of wave patterns, which may salvage some good out of missing that low.
In January 2004, Prechter called for the Dow to peak between 10,702 and 10,924, ideally near 10,754. It reached 10,855 on December 28. It remains to be seen whether we will ultimately label this juncture “Intermediate q” for our ongoing study of the efficacy of WP as a basis for stock market forecasting.
A Word on Probability
This study shows that forecasters using the Wave Principle correctly forecasted the stock market at 5 out of 5 (or 6 out of 6) major turns and 11 out of 16 intermediate turns. It is important to realize that one cannot judge these results accurately by assuming that the forecasting choices are simply the statistical equivalent of coin flipping. The proper question is: What are the odds of each individual within a small group of analysts correctly mapping out the future of the market years and sometimes decades in advance at times when most other analysts, economists and investors — as shown unequivocally by data of professional and public behavior and opinion — are in complete disagreement with these forecasts? To do a proper statistical analysis of this question, one would have to investigate how many among thousands of market commentators came to an equally correct conclusion at each market juncture. Then one would have to multiply each probability together to get an overall score. On that basis, the odds that this track record is a matter of chance would be, conservatively, one in billions.
Correcting a Misconception
The view of the proponents of stock market models that do not claim to predict (for example, the Random Walk and Indefinite Fractal models) is well expressed in this sentence: “As any chartist has learned to his sorrow, the most random and independent events can spontaneously appear to form patterns and cycles.”40 (Mandelbrot and Hudson, 2004) As this study shows, however, it is important to distinguish between the undoubted fact that an apparent pattern might disappoint and the presumption, shared by the majority of theoreticians (primarily proponents of EMH and Mandelbrot’s indefinite fractal model), that such is the only possible result. This study supports a different case: that real patterns exist, and they yield useful results.
23 For a description of third wave behavior, see Elliott Wave Principle, p. 80.
24 Drew, Garfield. (1948). “A Final Forecast by the Late R.N. Elliott.” New Methods for Profit in the Stock Market (2nd edition). Boston: Metcalf Press. Excerpted (2005): R.N. Elliott’s Masterworks. Robert R. Prechter, Jr., Ed. Gainesville, GA: New Classics Library, pp. 305-306.
25 Bolton, Arthur Hamilton (1953). “Elliott’s Wave Principle.” Supplement to the Bolton-Tremblay Bank Credit Analyst. Republished (1994): The Complete Elliott Wave Writings of A. Hamilton Bolton. Robert R. Prechter, Jr., Ed. New Classics Library, pp. 35-41.
26 Bolton actually wrote “Primary V.” In those days, Elliotticians had yet to standardize wave degree labels. I use “Primary ” in the quote to coincide with the label in Figure 22.
27 Bolton, Arthur Hamilton. (1960). “The Elliott Wave Principle – A Critical Appraisal.” Supplement to The Bolton-Tremblay Bank Credit Analyst. Republished (1994): The Complete Elliott Wave Writings of A. Hamilton Bolton. Robert R. Prechter, Jr., Ed. New Classics Library, p. 161.
28 Bolton, Arthur Hamilton. (1960). “The Elliott Wave Principle – A Critical Appraisal.” And (1962). “Annual Elliott Wave Review: 1962.” Supplement to The Bolton-Tremblay Bank Credit Analyst. Republished (1994): The Complete Elliott Wave Writings of A. Hamilton Bolton. Robert R. Prechter, Jr., Ed. New Classics Library, pp. 176, 225.
29 Ibid., p. 181
30 Although Bolton’s wave interpretation remained incorrect until early 1966 (when he deferred to Collins’ interpretation, as detailed under “Major 3” in Part I), his market opinion remained correctly bullish up to that time. As he himself explained, “From a practical point of view, of course, the differences are not too material [and] should be expected to coincide more completely as the current upward market develops.” [Ibid., p. 174]
31 See: The Elliott Wave Writings of A.J. Frost and Richard Russell. Robert R. Prechter, Jr., Ed. Gainesville, GA: New Classics Library, p. 15.
32 Frost, Alfred John. (1962, December). Unpublished paper. Published (1996): The Elliott Wave Writings of A.J. Frost and Richard Russell. Robert R. Prechter, Jr., Ed. Gainesville, GA: New Classics Library, pp. 59, 69.
33 Frost, Alfred John. (1968, June). “Elliott’s Wave Principle: 1968.” Supplement to The Bolton-Tremblay Bank Credit Analyst. Republished (1996): The Elliott Wave Writings of A.J. Frost and Richard Russell. Robert R. Prechter, Jr., Ed. Gainesville, GA: New Classics Library, pp. 133-134.
34 Frost, Alfred John. (1970, May). “Elliott’s Wave Principle: 1970.” Supplement to The Bolton-Tremblay Bank Credit Analyst. Republished (1996): The Elliott Wave Writings of A.J. Frost and Richard Russell. Robert R. Prechter, Jr., Ed. Gainesville, GA: New Classics Library, pp. 163-164.
35 Russell, Richard. (1973, November 9). Dow Theory Letters. Republished (1996): The Elliott Wave Writings of A.J. Frost and Richard Russell. Robert R. Prechter, Jr., Ed. Gainesville, GA: New Classics Library, pp. 215-221.
36 Prechter subsequently revised the labels within the 1974-1976 advance.
38 Prechter, Jr., Robert R. (1987, October 15). The Elliott Wave Theorist Interim Report.
39 For more details on this error, see View from the Top, pp.143-181.
40 Taking such a phrase as the essence of markets also ignores Paul Tudor Jones, Marty Schwartz and Dick Diamond, “chartists” who consistently make millions of dollars from financial market patterns. Given the frequency of these traders’ daily activity, statistics disallow one to chalk up their success to luck. They make money because the market is not random.
SOURCES OF ORIGINAL MATERIAL
Elliott, R.N. (1938). The Wave Principle. Republished (1980/1994): R.N. Elliott’s Masterworks. Robert R. Prechter, Jr., Ed. Gainesville, GA: New Classics Library, p. 144.
Elliott, R.N. (1939, April 11, through 1940, April 8). Interpretive Letters and Confidential Bulletins. Republished (1993): R.N. Elliott’s Market Letters (1938-1946). Robert R. Prechter, Jr., Ed. Gainesville, GA: New Classics Library, pp. 46-66, particularly the graph on p. 64.
Elliott, R.N. (1946). “The 1942-1945 Bull Market.” Nature’s Law. Republished (1980/1994): R.N. Elliott’s Masterworks. Robert R. Prechter, Jr., Ed., New Classics Library, pp.302-303; also R.N. Elliott, Interpretive Letters and Confidential Bulletins, April 28, 1942 through July 23, 1946. Republished (1993): R.N. Elliott’s Market Letters (1938-1946). Robert R. Prechter, Jr., Ed. Gainesville, GA: New Classics Library, pp. 132-139.
Elliott, R.N. (1946). “The 1942-1945 Bull Market.” Nature’s Law. Republished (1980/1994): R.N. Elliott’s Masterworks. Robert R. Prechter, Jr., Ed., New Classics Library, p. 303, final sentence. Also, Drew, Garfield. (1948). “A Final Forecast by the Late R.N. Elliott.” New Methods for Profit in the Stock Market (2nd edition). Boston: Metcalf Press.
Bolton, A. Hamilton (1953). “Elliott’s Wave Principle: 1953” The Bolton-Tremblay Bank Credit Analyst. Republished (1994): The Complete Elliott Wave Writings of A. Hamilton Bolton. Robert R. Prechter, Jr., Ed. Gainesville, GA: New Classics Library, pp. 39-45.
Bolton, A. Hamilton. (1961-1962). “The Elliott Wave Principle.” The Bolton-Tremblay Bank Credit Analyst. Republished (1994): The Complete Elliott Wave Writings of A. Hamilton Bolton. Robert R. Prechter, Jr., Ed. Gainesville, GA: New Classics Library, pp. 220, 228, 233.
Frost, Alfred John. (1962, December). Unpublished paper. Published (1996): The Elliott Wave Writings of A.J. Frost and Richard Russell. Robert R. Prechter, Jr., Ed. Gainesville, GA: New Classics Library. pp. 67-72.
Collins, Charles J. (1966). “The Elliott Wave Principle of Stock Market Behavior.” Supplement to The Bolton-Tremblay Bank Credit Analyst. Republished (1994): The Complete Elliott Wave Writings of A. Hamilton Bolton. Robert R. Prechter, Jr., Ed. Gainesville, GA: New Classics Library, p. 353.
Frost, Alfred John. (1968). “The Elliott Wave Principle of Stock Market Behavior.” Supplement to The Bolton-Tremblay Bank Credit Analyst. Republished (1996): The Elliott Wave Writings of A.J. Frost and Richard Russell. Robert R. Prechter, Jr., Ed. Gainesville, GA: New Classics Library, pp. 133-134.
Frost, Alfred John. (1970). “The Elliott Wave Principle of Stock Market Behavior.” Supplement to The Bolton-Tremblay Bank Credit Analyst. Republished (1996): The Elliott Wave Writings of A.J. Frost and Richard Russell. Robert R. Prechter, Jr., Ed. Gainesville, GA: New Classics Library, pp. 158, 163-164.
Russell, Richard. (1973). Dow Theory Letters. Republished (1996): The Elliott Wave Writings of A.J. Frost and Richard Russell. Robert R. Prechter, Jr., Ed. Gainesville, GA: New Classics Library, pp. 215-221.
Prechter, Jr., Robert R. (1977, February). “The Elliott Wave Principle: Application to Today’s Market.” The Elliott Wave Theorist. Not available in book form; for labeling, see Fig.4-13 in Elliott Wave Principle.
Prechter, Jr., Robert R. (1981, April 12). The Elliott Wave Theorist.
Prechter, Jr., Robert R. (1987, October 5). The Elliott Wave Theorist.
Prechter, Jr., Robert R. (1987, October-December). The Elliott Wave Theorist.
Prechter, Jr., Robert R. (2002, October). The Elliott Wave Theorist Interim Report.
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