© May 6, 2000

Interim Report
BIGGER DECLINE INDICATED FOR MAY
by
Robert R. Prechter, Jr.

“Look out, look out, look out, look out!” – The Shangri-Las

The consensus is that the stock market decline of April may have been all of the downside action we will see
for awhile. However, some esoteric technical evidence points to the likelihood of an even bigger panic in
May. Important: If the Dow rises just another 5% from here, then this potential will be eliminated. Here are
some of the technical factors to consider:

The Wave Principle: If the April decline and recovery were waves 1 and 2 of (3), then wave
3 of (3) is developing now. This wave is likely to be an actual crash, not a short shakeout like we had
in April.
Crash Timing: Researcher Steve Puetz showed years ago that crash days tend to happen 55
or 56 calendar days after the peak of a mania. The peak in the focal point of the mania has been the
NASDAQ 100. The top in the futures occurred on Friday, March 24; the top in the cash index
occurred on March 24 (intraday) and Monday, March 27 (close). 55-56 days from then is May 18-
22. The high in the broader Nasdaq Composite index occurred on March 10. 55-56 days from then
is May 4-5. The market could have bottomed on May 4, but it is more likely topping in another
“wave two” on May 5 (see Seasonality below).
Scheduled News Event: News does not move the market, but knowledge of a coming event
can serve as a focal point for optimism or fear. The Fed will meet on May 16. Whatever it does will
not change the market’s trend. If the market is in the grip of a bear (a big “if” that we must await to
know) and the Fed raises rates, the market will be afraid; if the Fed does not raise rates, the market
will be afraid. This news event, however it turns out, may serve retrospectively as a rationalization
for why the worst down day occurs in the May 16-18 period.
Seasonality: May is the second-weakest month of the year on average for stock prices, after
October. (They have some kind of kinship; May Day is bacchanalian, like Halloween.) Some Mays
are up, of course, so all we have is probability. However, as Yale Hirsch put it in 1986,
“In recent years, the market gets clobbered in May with monotonous regularity. Starting in
1965, May has been up only five times and down sixteen times for a net loss of 345.82 Dow
points…. May is a ‘disaster’ month.”*

The market fell particularly hard in the Mays of

1932, 1940, 1949, 1962 and 1970. Notice that all
these were bear market years. Since Hirsch’s book
was published, the Mays of 1986, 1987, 1988,
1998 and 1999 were down. This is five years out
of fourteen, or 36%, which is quite a record con-
sidering that most months during the stock mania
have been up.
 The Elliott Wave Theorist -- May 6, 2000

Says Hirsch, “May markets tend to come in like bulls, exit like bears.” Notice that the daily seasonal
average graph shows that the first five trading days of May tend to be upwardly biased. This takes us
through Friday, May 5. This year, the period encompassing the downward seasonal bias is May 8-
26.

To summarize, the scenario is as follows: The last “wave 2” bounce ended Friday or will do so early Mon-
day. The next two to three weeks should have a downward bias. Wave 8 of 3 of (3) will be a crash, ending
May 17-22. Then a series of increasingly larger fourth waves up and fifth waves down would carry well into
the summer to complete wave 1 down. May’s seasonal tendencies even support the latter part of this sce-
nario. Unlike October, which tends to wash the market out into a bottom (a “bear killer,” it’s called), May is
more likely to be a month when downtrends begin or accelerate. Hirsch says, “May ranks next to last among
all the months in purchasing stocks for 1-, 2-, 3- and 6-month holding periods.” Only April is worse. So
while buying in April, on average, is the worst seasonal decision you can make, buying in May, even on
weakness, is not much better. Thus, the expected Elliott wave pattern is compatible with the seasonal ten-
dency of May to see declines but not bottoms.

No scenario is carved in stone. Scenarios this specific have a miniscule chance of working. Nevertheless,
there is enough correspondence here to warrant bringing it to your attention. According to the history of
Mays since 1932, whether May 2000 will see a major decline rests greatly on whether a bear market has
begun. Perhaps the fact that the market was weak despite strong seasonal tendencies in April is a hint that its
bias has changed from up to down. The market’s behavior in May will help us answer this question. If the
Dow exceeds 11,000 or the S&P 1490, this scenario will no longer be indicated.

*The quotes on seasonality are from Hirsch, Yale, Don’t Sell Stocks on Monday, Facts On File Publications, New York,
1986, pp. 4, 129.

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