January 25, 2010 / 7:47 PM / 9 years ago

Next bear market phase starting: Prechter

NEW YORK (Reuters) - The next leg of a bear market in stocks has probably started and gold and corporate bonds are likely to slide as the U.S. economy suffers long-term weakness, technical analyst Robert Prechter said on Monday.

Prechter has previously said he believes the 2007-2009 markets crisis and U.S. recession were harbingers of a severe, longer economic downturn. His book “Conquer the Crash” first published in 2002 , warned about the dangers of a deflationary depression and Prechter maintains the United States economy will struggle for years to come.

“We probably have begun the next phase of the bear market,” said Prechter, president of research company Elliott Wave International in Gainesville, Georgia and known for predicting the 1987 stock market crash.

The U.S. S&P 500 index has fallen about 5 percent since hitting a 15-month peak on January 19 as some investors started to worry about the possibility of a double-dip recession.

Although many stock analysts expect a short term pullback of about 10 or 15 percent in U.S. stocks, Prechter, known for his bearish views, expects a steeper, longer term fall.

Within the bear market Prechter says started in 1999, this latest stock rally “is the third I think final peak,” he said in a telephone interview with Reuters.

For investors in equities, this is “the last chance to get out with the Dow in quintuple digits,” Prechter added.

Prechter adhered to his earlier forecasts U.S. stocks will fall below 12-year lows hit in March 2009, with the S&P 500 index .SPX falling below 666 points as the economy worsens, and as investors' recent optimism about risky assets fades.

Last year “was a respite for anyone who was stuck in corporate paper, municipal paper, stocks and commodities,” he said.

Now, along with stocks, corporate bonds are set to fall to lower levels than in the market panic of 2008, he said.

U.S. corporate bonds rallied spectacularly last year as investors regained their nerve in the aftermath of the global financial crisis.

Most bond analysts do not expect investment grade corporate bond yield spreads to revisit all-time wides over government bonds hit in late 2008. That was when investors panicked over a potential rerun of the Great Depression and demanded a huge premium for the risk of holding corporate debt.

Prechter expects U.S. investment grade corporate bond yield spreads to exceed the 656 basis point record of December 2008.

NO GLITTER FOR GOLD?

If deflation — an environment in which prices of everything from houses, to cars, to wages fall — does set in, gold, which in some respects is a hedge against inflation, is likely to fall precipitously in value, he expects.

Gold “is over-owned and overvalued and is about to resume a bear market, if hasn’t already,” said Prechter.

“I think it could drop at least 40 percent from its peak value,” he added.

Spot gold was trading at about $1,095 per ounce on Monday, after hitting a record high of around $1,226 on Dec 3., hurt by a firming dollar, and investors’ ebbing confidence about economic growth and inflation prospects.

DOLLAR SILVER LINING?

Prechter reiterated his longstanding advice to investors to shelter in Treasury bills until between about 2014 and 2016 when he expects the unwinding of the biggest debt bubble in history will start to abate.

“The bear market (in stocks) has a number of years left to run: four to six more years,” he said. “It makes it prudent to stay in the safest cash equivalents till it’s over,” and perhaps keep some money under the mattress as well in case of problems in the banking system, he said.

Over about the next year, the dollar should continue gaining against the euro Prechter said. In October, Prechter said the dollar was bottoming.

The dollar has rallied nearly 5 percent against a basket of currencies .DXY since a November 26 low amid expectations of higher U.S. interest rates given strong economic data.

Reporting by John Parry; Additional reporting by Gertrude Chavez-Dreyfuss, Ellis Mnyandu and Frank Tang, Editing by Andrew Hay

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