The Responsibility of the Media

An article from The New York Times News service ran in yesterday’s (July 6, 2010) Oregonian. The article was titled, “Get out now, stock theorist warns.” The article described how one stock market forecaster, Robert Prechter, is predicting that the Dow “is likely to fall below 1,000 over perhaps five or six years …”

Apparently, Mr. Prechter is a forecaster and social theorist who basis his work on something called the Elliott Wave Theory. I will admit that despite having been an avid student of investing for a decade and I have never heard of this theory. So, I went on the web and did some research.

As I suspected, Elliot Wave Theory is a form of technical analysis (source: Wikipedia.org). It is used to forecast trends in financial markets by identifying extremes in investor psychology, highs and lows in prices and other collective activities. The concept was developed by Ralph Nelson Elliott (1871-1948) who was a professional accountant.

I have studied technical analysis. It uses price and volume data in an effort to predict the direction of a security or the market in general. It has been widely discredited in the academic community. Burton Malkiel’s book, A Random Walk Down Wall Street, is probably the most well known work that refutes the notion that security prices follow any pattern. The Efficient Market Hypothesis, even in its weakest form, dismisses the usefulness of pricing data in market forecasts.

I find it disturbing that the media would pick up the shocking predictions of one prognosticator and suggest the investors should “get out” of the market. This to me is completely irresponsible journalism. I could easily find several equally credible market forecasters who predict that the market will reach some glorious new level in the next five years.

The truth is that no one knows where the market is going. A read of the most credible work on investing consistently warns readers to be wary of anyone who claims to know where the stock market is headed. There are two kinds of people. Those who know they do not know and those who don’t know they don’t know.

Shame on The Oregonian for printing an article that was clearly intended to incite the reader. Just what we need. Millions of investors panic and sell their investments. Then Mr. Prechter’s predictions just might come true.