Stock Luncheon Meat and Buy Guns (or locally, Parangs)

The stock market is taking a beating again and Robert Prechter, the market forecaster and social theorist, is convinced we have entered a market decline of staggering proportions – perhaps the biggest of the last 300 years.

Though no other forecaster was likely to accept his reasoning, which is based on his version of the Elliott Wave theory – a technical approach to market analysis that he embraces with evangelical fervor.

The Elliott Wave Theory

Originating in the writings of Ralph Nelson Elliott, an obscure accountant who found repetitive patterns, or "fractals," in the stock market of the 1930s and '40s, the theory suggests that an epic downswing is underway, Prechter said. But he argued that even skeptical investors should take his advice seriously.

"I’m saying: ‘Winter is coming. Buy a coat,’" he said. "Other people are advising people to stay naked. If I’m wrong, you’re not hurt. If they’re wrong, you’re dead. It’s pretty benign advice to opt for safety for a while."

Cash is king: Move out of the market or short sell

His advice: Individual investors should move completely out of the market and hold cash and cash equivalents, like Treasury bills, for years to come. (For traders with a fair amount of skill and willingness to embrace risk, he suggests other alternatives, like shorting the market or making bets on volatility.) But ultimately, "the decline will lead to one of the best investment opportunities ever," he said.

The unraveling of Dow and the economy, combined with a depression and deflation, will make anyone holding cash "extremely grateful for their prudence."

Why it's going to be like the Great Depression or the Panic of 1873

Buy-and-hold stock investors will be devastated in a crash much worse than the recent declines of 2008 or the worst years of the Great Depression. According to him, it goes all the way back to England and the collapse of the South Sea Bubble in 1720, a crash that deterred people "from buying stocks for 100 years.

Crying wolf?

Prechter is not alone. Ralph J. Acampora, a market analyst with more than 40 years of experience, said he moved entirely out of stocks and into cash late last month. He said recent setbacks suggested that the market would drop another 10 or 15 percent, probably until September or October, before resuming another "meaningful rally."

Like Prechter, he is a past president of the Market Technicians Association, the leading organization of technical market analysts, and he said that his colleague has done "some very good work." But Acampora doesn’t agree with Prechter’s long-term theories.

The "mathematics don’t work," Acampora said, because such a big decline would imply that individual stocks would need to trade at unrealistically low levels. He does agree with Prechter's findings on a "near-term" basis.

"I don’t want to agree with him, because if he’s right, we’ve basically got to go to the mountains with a gun and some soup cans. It would be all over."

Who is Prechter?

A graduate of Yale University, the 61 year old lives in Gainesville, Ga., where he runs Elliott Wave International, a forecasting and publishing firm. The former technical analyst for Merrill Lynch was fascinated by Elliott’s writings, which suggest that the market moves in predictable if complex patterns. By 1987, he was widely regarded as an expert in technical analysis. Articles in The New York Times said he was known as "the market’s leading technical guru" – and more.

His Predictions

Along with A.J. Frost, Prechter wrote "Elliott Wave Principle," a 1978 book that predicted the emergence of a great bull market – a forecast that was largely fulfilled. 

In 2002, he published "Conquer the Crash," which predicted misery ahead. Accurately, he said in 2008 that the market would soon rally sharply – then said late last year, he correctly noticed that stocks were about to fall and that the great decline would resume.