Lengthy "Mania" In Stocks

As the US equity market has charged higher in recent years, etching the greatest bull market in history on the charts, Prechter admitted, "I've been premature in thinking that we are late in the cycle. But it's unprecedented to have a manic mood expand for 17 years."

He examined 300 years of financial history and concluded that the current "mania" was the longest. He said the "tulip bulb" and "South Sea" bubbles, in Holland and Europe in the 1630s and about 1718, respectively, lasted only 2 to 3 years. The "mania" in the US markets in the 1920s lasted 8 years, and a similar type of bubble occurred in Japan from 1974 to 1989, leaving the current US experience--which Prechter defines as having begun in 1982--as the longest.

"We are at extremes that have never been recorded in Western history," he says. He points to the low dividend payout--currently between zero and 1.5% for the major averages-- and evaporating book values as examples.

"It's never been that low in the US before," he says. "If people are not receiving a dividend and own little underlying property, that means the only reason they are holding that stock is because they believe it will go up in price."

Using history as a potential gauge for future activity, Prechter says, "Every mania has been followed by a crash in values that brought prices below their starting point."

Pointing to the crash in European stock markets after the South Seas bubble, he observes that the average stock price plummeted by 98%. The 1920s bull market was followed by a slide of 89%. The Nikkei sank 65% to its 1998 low, and “it’s not over yet.”

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