by Wendell Cayton

In a tradition that dates back 150 years to the California gold rush, a bull and a bear were thrown into a ring to do battle as entertainment for the miners. The modern “miners” in this spectacle were a group of stockbrokers and financial service professionals from the United States and Canada. The furry critters providing the entertainment were two widely followed stock market prognosticators—one an unapologetic bull and the other an unabashed bear.

These two opposites shared a stage in a debate at an Atlanta conference I recently attended. Bearing fangs and sharpened claws was “Bear” Robert Prechter, Jr., an avowed advocate of the Elliott Wave system of technical stock market analysis. Dueling with pointed horns and slashing hoofs was “Bull” Harry Dent, famous for his optimistic views of the stock market.

Prechter is widely recognized as an advocate of a form of technical analysis known as the Elliott Wave Theory. Users of this theory predict future market movements based on charting prior patterns of market performance. Elliott Wave theorists generally believe the stock market will move in a five-wave pattern. A correcting down wave follows each upward wave. By the fifth wave, the correcting event is generally thought to be a downward market fall to below the levels of the start of the first wave.

According to Prechter, the market is approaching the top of a fifth wave in a pattern that began with the market crash of 1929. Therefore, he is predicting a major correction, with the Dow pulling back to a 60 year low. Prechter has made similar claims in the past, one as recent as May 1997 when he inaccurately forecasted such a drop. Despite that missed call, he remains convinced the markets are poised for a serious correction.

For those more interested in fact than fantasy graph models, Dent provided hard evidence and research based on consumer spending pattern. His models project a Dow roaring ahead to the range of 40,000 before he sees a major correction, which he predicts will hit sometime between 2007 and 2010.

Dent, best selling author of The Roaring 2000s, makes no apologies for his optimistic future for the next seven to 10 years. Using models based upon demographic trends, Dent sees a stock market continuing to climb into the later part of the first decade of the new millennium. He first unveiled his analysis in 1993 in his book The Great Boom Ahead. He based his predictions for stock market movements on the spending and savings habits of the population. He theorizes that the economy is driven by spending and savings patterns that are a function of the age of the population.

According to Dent, a younger population is likely to spend heavily for establishing a household formulation, using a considerable amount of credit in the process. This will drive up interest rates and inflation, similar to what the country experienced in the late 1970s when the BabyBoomers were young and establishing households.

Spending patterns change later in life. As children grow and leave home, parents enter their peak earning years and begin to concentrate on the accumulation of financial assets. Buying patterns change and saving increases. Interest rates and inflation fall as the mature work force becomes more productive.

In my opinion, Dent provided readily understandable facts and fundamental arguments to back his argument while Prechter relied on theories based upon fitting lines to charts of past market movements. I would have to say the “Bull” in this case won over the crowd…but one could also say that is a little like preaching to the choir!