Robert R. Prechter again demonstrated this week why he is considered one of the nation's most influential stock market forecasters. His prediction Monday that the market was due for a sharp correction helped spark Tuesday's record 91.55-point drop in the Dow Jones average of industrial stocks.
Similar forecasts during the past year also preceded sharp market declines. And his long-term forecast that the Dow will hit 3,600 in 1988 doesn't look so farfetched today as it did when originally made in 1983, when the widely watched index was still well below the 2,000 level.
But Prechter these days could easily be called the Reticent Guru. The former drummer in a rock band refuses to take any credit for beating down the market.
"The market takes all the credit," Prechter said Wednesday in an interview from his office in Gainesville, Ga., where he edits and publishes the 15,000-subscriber Elliott Wave Theorist newsletter far from the bustle--and hype--of Wall Street.
"When the market makes dramatic moves, they (analysts) need reasons to explain it. They pick me as one of them," he said, adding that he--like other market forecasters--has been wrong many times.
Instead, Prechter said, the true cause of Tuesday's free fall was found in so-called technical market indicators. They showed that the latest short-term rally, during which the Dow rose about 150 points between Sept. 22 and Oct. 2, was the "poorest rally of the year," Prechter said.
One such indicator was the percentage of stocks rising versus falling, a measure often called breadth or the advance-decline ratio. The more stocks that rise in a rally, the stronger the rally.
But breadth in the latest rally was weak, Prechter said. On no single day of the rally--including Sept. 22, when the Dow gained 75.23 points, a record one-day point rise--did advancing stocks outnumber losers by more than 2 to 1.
Making sense of these and other technical indicators has been the mainstay of Prechter's work. And his success at using them to forecast the current bull market's gyrations has gained him and other technical analysts a wider following.
Technicians generally ignore price/earnings ratios, company balance sheets and other so-called fundamental indicators, focusing instead on specific volume and price trends and other patterns of investor psychology.
"I have great respect for Bob. He is one of the few people, if not the only, who makes me feel uncomfortable when we (disagree)," said Peter G. Eliades, editor and publisher of Stockmarket Cycles, a newsletter published in Los Angeles. Eliades is regarded by some experts as Prechter's primary rival for billing as the nation's top "market timer"--a forecaster who tries to pinpoint the exact timing of short-term market swings.
Underpinning all of Prechter's work is the Elliott Wave Theory, developed during the 1930s by Ralph N. Elliott, an obscure accountant who lost much of his savings in the 1929 stock market crash. Elliott reasoned that markets follow predictable "waves" rooted in human psychology, alternating between pessimism and optimism.
Prechter, 38, discovered Elliott's ideas while working as a technical analyst for Merrill Lynch, where he went at the age of 25 after earning a psychology degree from Yale University.
He launched the Elliott Wave Theorist newsletter in 1978 and started to gain national notoriety when he correctly predicted the bull market's beginning in 1982.
Prechter also was credited in part for sparking the Dow's previous record one-day decline of 86.61 points on Sept. 11, 1986. A similar bearish forecast preceded a 57-point drop last March.
And on Monday, Prechter told subscribers that the Dow's failure to move beyond the 2,650 level signaled a short-term correction under which the index could fall to as low as 2,300. That statement, along with worries about higher interest rates and computerized selling programs by institutions, were widely credited for fueling Tuesday's record selloff.
But even though he is bearish in the short term, Prechter remains bullish in the long term. He continues to stick to his August, 1983, forecast that the Dow will reach 3,686 by 1988, "give or take 100 points."
The market, Prechter contends, is on the fifth and last major wave of an Elliott Wave "supercycle" that began in 1932. After reaching its peak of about 3,686, the market will suffer a crash similar to its 1929 collapse, Prechter says.
Of course, not everybody buys Prechter's ideas or his infallibility.
"He's been wrong many times," said Michael Metz, market strategist at the Wall Street firm of Oppenheimer & Co.
Indeed, Prechter admits that he has been overly bearish on gold in recent months. "If the market truly listened to Bob Prechter, gold would be a lot lower," he quipped about his gold errors.
But Prechter remains convinced that his long-term prognostications will turn out to be correct. He also realizes that if he slips, his following as today's top guru could easily slip away as well.
"But if I'm doing my work, I should be right most of the time," he says.