Technical Market Gurus

Technical Market Gurus

Joseph Granville was one of the most widely followed forecasters of the early 1980s. His record had been good for a time in the late 1970s, and at his heyday he had the power to move markets. At 6:30 pm on January 6, 1981, Granville sent word to his 3,000 investor-subscribers around the world. “Sell the market – sell everything.”

The next morning brokerage houses were deluged with sell orders, and the Dow Jones industrial average dropped 24 points, representing some $40 billion inn paper losses, three times the dollar amount lost on Black Thursday inn 1929. Granville’s buy recommendation the the previous April had sent the Dow up 30 points in ne day and his sell signal in September 1981 touched off near panic on world financial markets. Thins of the ego satisfaction. Public adulation for Granville resembled that accorded rock stars. His traveling seminars were always oversubscribed. Asked at one seminar how he stayed close to the market when traveling, he dropped his pants to reveal various stock quotes printed on his shorts. When Joseph Granville talked, investors really did listen – at least for a while.

Unfortunately for Granville, his forecast accuracy during the 1980s left much to be desired. The Granville market letter warned of stock-market disaster throughout the early 1980s. Indeed, with the Dow Jones industrial average at 800, Granville told subscribers we were in a stock-market crash. He opined that investors should not only sell all their stock, but sell short as well, to take advantage of the coming financial Armageddon. The market responded by rising to the 1,200 level. “The bull market has been a bubble,” Granville remarked in 1984, continuing to warn a somewhat smaller number of listeners that the crash was near at hand. Granville’s followers missed the spectacular bull market of the 1980s. His reputation as a seer and a mover of markets had been severely tarnished.

Black Lake, Evergreen Bricks, Toronto. Photo by Elena

During the 1980s, Granville was succeeded as the most influential market guru by Robert Prechter. Prechter became interested in the parallels between social psychology and the stock market while a Yale undergraduate. After college, while Granville was making his reputation, Prechter spent four years playing drums in a rock band, after which he joined Merrill Lynch as a junior technical analyst. There Prechter stumbled upon the work of an obscure accountant, R. N. Elliott, who had devised an arcane theory which he modestly entitled the “Elliott wave theory.” Elliott’s premise was that there were predictable waves of investor psychology and that they steered the market with natural ebbs and flows. By watching them, Elliott believed one could call major shifts in the market. Prechter was so excited about this discovery that he quit Merrill Lynch in 1979 to write an investor newsletter from the unlikely location of Ganiesville, Georgia.

Prechter’s initial predictions were uncannily accurate. Early in the 1980s he predicted a major bull market with the Dow expected to rise to 3,600, after an interim stop at 2,700. Just when Granville’s predictions were shown to be egregiously wrong, Prechter was the hero of the day by keeping his followers fully invested through October 1987.

The situation then becomes murky. To Prechter’s credit he said, on Octber 5, 1987, there was “a 50/50 risk of a 10% decline” in the market, when the Dow was still selling above 2,600, and he advised traders and short-term investors to sell.

Institutional investors were advised, however, to hang on for the ultimate target of 3,686. After the crash, with the Dow near 2,000, Pretcher turned bearish and recommended holding Treasury bills. Prechter opined “the great bull market is probably over” and the Dow would eventually plunge below 400 in the early 1990s. By not advising repurchase, Pretcher missed out on a blue chip stock rally, which two years later pushed the average to nearly 2,000. This was a mortal sin for a guru.

Pretcher was succeeded by Elain Garzarelli, en executive vice-president of the investment firm os Shearson, Lehman, Hutton. Garzarelli was not a one-indicator woman. She plunged into the ocean of financial data and used no fewer than thirteen different indicators to predict the course of the market. Garzarelli always lied to study vital details. As a child, she would get animal organs from the local butcher and dissect them.

Garzarelly was the Roger Babson of the 1987 crash. Turning bearish in August, she was recommending by September 1 that her clients get completely out of the stock market. By October 11 she was almost certain that a crash was imminent. Two days later, in a forecast almost frighteningly prescient, she told USA Today that a drop of more than 500 points in the Dow Jones averages was coming. Within a week, her predictions were realized.

But the crash was Garzarelli’s last hurrah. Just as the media were coronating her as the Guru of Black Monday, and as adulatory articles appeared in magazines from Cosmopolitan to Fortune, she drowned in her prescience – or her notoriety. After the crash she said she wouldn’t touch the market and predicted that the Dow would fall another 200 to 400 points. Thus, Garzarelli missed the bounce-back in the market and the funds she managed underperformed the indices badly during 1988. In explaining her lack of consistency, she gave the time-honored explanation of technicians: “I failed to believe my own charts.”

The moral to the story is obvious. With large numbers of people predicting the market, there will always be some who have called the last turn of even the last few turns, but none will be consistently accurate. To paraphrase the biblical warning, “He who looks back at the predictions of market gurus dies of remorse”.

Burton G. Malkiel. A Random Walk Down Wall Street, including a life-cycle guide to personal investing. First edition, 1973, by W.W. Norton and company, Inc.