NEW YORK Longtime technical analyst Robert Prechter said on Tuesday he expects that as the U.S. economy sinks into a deflationary depression stocks will plunge.
The Dow Jones industrial average .DJI stock index could fall to between about 1,000 and 3,000 points over the next five to seven years, he said in a telephone interview. The Dow was trading at 9,754 in early afternoon on Tuesday.
"It is very clear there is substantial stock market risk," said Prechter, who urges investors to put their money in cash proxies such as safe-haven U.S. Treasury bills instead.
Prechter is known for his very bearish views on the economy and also for forecasting a big bull market in stocks in 1982 and for getting out before the 1987 market crash.
Over the near term, the dollar will remain under pressure against the euro and against the safe-haven Swiss franc, he said.
In early June, Prechter said the euro was about to embark on a near-term rebound of about 10 percent over two or three months because technical indicators showed that amid the euro zone sovereign debt crisis, investors had become overly bearish on that currency.
Prechter reiterated that forecast on Tuesday, saying that the euro will continue firming for about another two months, until it has gained about 10 percent.
In the past month, the euro has gained about 6 percent against the dollar.
But because Prechter expects that both the euro-zone and the U.S. economies will experience deflation, he prefers investing in the classic safe-haven currency, the Swiss franc.
He forecast that the dollar could weaken to parity against the Swiss franc over the next few months. On Tuesday, the dollar was buying 1.0579 Swiss francs.
"If you are betting against the dollar, the Swiss franc is a better place to go (than the euro)," Prechter said.
Recent data have shown the pace of U.S. economic growth is decelerating, with housing turning especially weak.
"U.S. house prices are about half way down in their bear market," said Prechter, adding that on aggregate, U.S. house prices have fallen about 40 percent from the peak.
Prechter, the president of research company Elliott Wave International in Gainesville, Georgia, is also known for his 2002 book, "Conquer the Crash," which warned about the huge credit bubble that burst a few years later.
As companies struggle in an economy that Prechter expects to become increasingly gloomy, he expects junk bond yields to continue widening over Treasuries.
High-yield corporate bond spreads have widened to more than 700 basis points now from about 550 basis points in late April, according to Bank of America Merrill Lynch data.
"We think we are back in a widening spread trend between reliable debt and risky debt," he said. "That's a safer bet than forecasting interest rates per se," Prechter added.
The bear market in crude oil, which started after prices hit a record $147 per barrel in summer 2008, is not over, Prechter said. Oil should fall below its December 2008 lows of about $32 per barrel, he added.
(Additional reporting by Nick Olivari, Wanfeng Zhou and Gene Ramos in New York and Pedro da Costa in Washington; Editing by Kenneth Barry)