Granville Predicts 2005 Dow Crash

Joe Granville is a very well regarded technician (now in his 80s) who has had some terrific calls in his career, and a few duds  as well. On Bloomberg, there was a story on his most recent commentary, but I cannot seem to find it now; It more likely got moved than disappeared for nefarious reasons.

Anyway, Joe just got Bearish big time. Here’s an excerpt:

"Joseph Granville, who accurately forecast in 2000 that U.S. stocks’ bull market would end, is at it again. He expects the Dow Jones Industrial Average to suffer its biggest annual loss this year since the Great Depression.

“We’re in the critical portion of a coming collapse and the market’s screaming to get out,” said Granville in an interview from Kansas City, Missouri. “Everyone’s bullish. There’s going to be a tremendous surprise and it’s going to be to the downside.”

"Granville, publisher of the Granville Market Letter since 1963 and a technical analyst for almost 50 years, also foretold a stock-market decline in 1976. He misfired in 1982 and 1995 by calling for losses before share prices surged.

The 81-year-old analyst expects the Dow average to retreat to at least 7400 by year-end. The forecast amounts to a plunge of 31 percent. The last year in which the benchmark fell that much was 1937, when it lost 33 percent.

As a technical analyst, Granville predicts the market’s direction by using criteria such as trading and price patterns, rather than earnings and economic growth. He started developing his stock market theory at what was then E.F. Hutton & Co., a New York-based brokerage, from 1957 to 1963."

That bodes well for my 2005 forecast, as Joe tends to be early. I’m still looking for one last strong move up — Dow 11,700, Nasdaq 2600 — before it all heads south. Note that also gives me the opportunity to stay long if the uptrend remains in tact.

One of the key mistakes to avoid – call it the peril of predictions — is to  never marry a forecast, especially your own. People wrap up too much ego in what is essentially educated guesswork. If you start with the assumption that your prediction is going to be wrong, its real easy to reverse yourself when necessary . . .

If you are interested in learning more about Granville,start with this article — Just Like Old Times as Joe Granville Yells `Sell’ — it gives some background on him if you are unfamiliar with his work.

Some more background on Granville:

Timing the Market
http://www.vectorvest.com/research/timingthemarket.htm

Joe Granville, father of the On  Balance Volume (OBV) and its analysis
http://www.paritech.com/paritech-site/education/technical/indicators/strength/onbalance.asp

Bibliography of Published Books
http://www.amazon.com/exec/obidos/search-handle-url/index=books&field-author=Joseph%20E%20Granville/104-3776013-8226334

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UPDATE: March 18, 2005  7:09 am
Mark Hulbert provides the details on Granville’s track record. Not impressive (unless you are a fan of the Black Swan event . . .)

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UPDATE: I still cannot find this anywhere, but a friend captured the text. Here it is for your enjoyment:

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Equity Strategists: Granville Predicts 2005 Dow Crash
2005-02-04 11:16 (New York)
By Ari Levy

Feb. 4 (Bloomberg) — Joseph Granville, who accurately forecast in 2000 that U.S. stocks’ bull market would end, is at it again. He expects the Dow Jones Industrial Average to suffer its biggest annual loss this year since the Great Depression.

“We’re in the critical portion of a coming collapse and the market’s screaming to get out,” said Granville in an interview from Kansas City, Missouri. “Everyone’s bullish. There’s going to be a tremendous surprise and it’s going to be to the downside.”

Granville, publisher of the Granville Market Letter since 1963 and a technical analyst for almost 50 years, also foretold a stock-market decline in 1976. He misfired in 1982 and 1995 by calling for losses before share prices surged.

The 81-year-old analyst expects the Dow average to retreat to at least 7400 by year-end. The forecast amounts to a plunge of 31 percent. The last year in which the benchmark fell that much was 1937, when it lost 33 percent.

As a technical analyst, Granville predicts the market’s direction by using criteria such as trading and price patterns, rather than earnings and economic growth. He started developing his stock market theory at what was then E.F. Hutton & Co., a New York-based brokerage, from 1957 to 1963.

`Pants Down’
Granville’s main indicator is called on-balance volume, or OBV, which he developed. The idea “caught me, quite literally with my pants down,” he wrote in “The Book of Granville,” published in 1984. “One August morning in 1961 I sat on the toilet in the men’s room, away from the hubbub of the research department, musing about the stock market.”

OBV gauges a stock’s momentum. If a stock rises, the day’s volume will be added to a cumulative OBV figure. If the share price falls, the total will be subtracted. Granville applies this analysis to all 30 stocks in the Dow each day.

“Volumes are pointing to declines based on what I’ve learned,” he said.

The Dow average has dropped 1.8 percent this year to 10,593.10, led by Merck & Co.’s 12 percent slump. Granville predicted that the benchmark would tumble 12 percent in the first quarter, to 9500.

Granville also follows charts that track the daily number of advancing and declining stocks, the number of stocks reaching 52- week highs and lows, and investor sentiment. He compiles the measures into what he call his “Net Field Trend Indicator,” used to predict the market’s direction.

‘Last Legs’

In his Jan. 20 newsletter, he wrote that his indicator had retreated to its level on Oct. 21, 1929, eight days before the Dow’s two-day, 24 percent plunge. “The Dow is technically on its last legs,” he wrote.

Granville, who has written books on subjects ranging from stamp investing to winning at Bingo in addition to the stock market, has made accurate forecasts in the past.

On March 11, 2000, the day after the Nasdaq climbed to a record 5048.62, Granville wrote that investors in technology stocks “will soon be burned.” The index plunged 78 percent before bottoming on Oct. 9, 2002.

In 1976, in his book “Granville’s New Strategy of Daily Stock Market Timing for Maximum Profit,” he said a bear market would occur from 1977-1978. The Dow plunged 26 percent from the beginning of 1977 through February 1978 after a two-year surge.

1987
Granville has also been wrong. He was bearish from 1982 until early 1986, according to the Hulbert Financial Digest, a service of MarketWatch Inc. that tracks and ranks more than 180 financial market newsletters. Over that period, the Dow had a 17 percent annualized return.

During the Crash of 1987, he was bullish, Hulbert said. The average plunged 23 percent on Oct. 19 of that year.

Granville, who charges a $250 annual subscription rate for his weekly market letter, was also incorrect in predicting a stock-market plunge in October 1995. He turned bullish in July 1996, after the Dow industrials climbed about 20 percent.

“Unlike most letter writers, I admit when I’m wrong,” he said. On March 14, 2002, he published a letter entitled “I Was Wrong” that admitted to “staying cautious” for too long in February 2002. The Dow gained 5.9 percent between Jan. 31 and March 13, the day before his admission.

“He’s very well respected as a market technician, but the bottom line is the bottom line,” said Mark Hulbert, editor of the Hulbert Digest. For anyone who followed his advice during the past 20 years, “Would you be better off than putting your money in an index fund? The answer is no.”

5 Percent

Granville’s record as a market timer is better for the five years ended in December, according to Hulbert’s data. Investors using his recommendations to buy and sell a fund mirroring the Wilshire 5000 Index would have produced a 5 percent annualized return. Investors who bought and held the index fund for those five years would have lost on average 1.4 percent a year.

Even with his bleak forecast, Granville isn’t the most bearish technical analyst. Robert Prechter, chief executive of Elliot Wave International, has predicted the Dow may eventually fall below 1000.

Granville is more bearish than strategists at investment banks, who focus more on fundamentals such as earnings. They expect the S&P 500 to climb 3.1 percent to 1250 in 2005, based on the median estimate in a survey of 14 analysts by Bloomberg.

In his view, it’s better to follow his advice than to listen to firms on Wall Street, which “seldom get it right.” Charts show “the market will go up on falling earnings and down on rising earnings,” Granville wrote on Jan. 27. This “makes one wonder about the level of Wall Street intelligence.”

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Sources:
Bloomberg

Just Like Old Times as Joe Granville Yells `Sell’
Chet Currier
Bloomberg,  Feb. 11
http://quote.bloomberg.com/apps/news?pid=10000039&refer=columnist_currier&sid=ayJ1tcs4oY1A