This essay by Peter Kendall originally appeared in The Elliott Wave Financial Forecast in June 2001. Its citation is:

Prechter, Robert R. (2003). Pioneering Studies in Socionomics. Gainesville, Georgia: New Classics Library, pp. 173-175

The book is also available for purchase as part of a two-volume set.

Global conflict is a product of a downturn in social mood. The inescapable tensions between nations and distinct social groups that arise at such times is best illustrated by our long term chart of the Political Results of Social Sentiment (see page 337 of The Wave Principle of Human Social Behavior or the June, 2000 issue of The Elliott Wave Financial Forecast), which shows Hitlers rise to power, World War II, the Holocaust and the dropping of two atomic bombs on Japan between the bear market lows of 1932, 1942 and 1949.

Figure 1

Social clashes take myriad forms, but one bellwether rift that has an almost perfect record of erupting into open hostility right at the onset of major downturns is in the Mideast . Figure 1 shows that relations between Jews and Arabs in Israel (or Palestine before 1948) have been particularly responsive to the onset of important bear markets since 1929. In that year, says The Year of the Great Crash, All hell had broken loose in Palestine . At the end of August, a series of relatively inconsequential disputes concerning the privileges of worship for Jews and Muslims erupted into an orgy of bloodletting. The violence came a few days before the Dows final high.

If major hostilities are defined as wars or mob violence that result in mass killings, each of the headlines on the graph marks a significant outbreak. All were preceded by periods of easing tension (or at least an absence of bloodshed) and followed by further clashes. The greatest stretch of peaceful cooperation between the two sides is shown in the Era of Good Feelings table at the bottom of Figure 1. It started on September 13, 1993 with the famous handshake between the Prime Minister of Israel and the Chairman of the Palestine Liberation Organization. Historians said the handshake was a symbol of a major breakthrough after a century of conflict. The Elliott Wave Theorist identified it as a product of the century-long advance in stock prices that would mark a long-term top rather than a great new era for Palestinian and Israeli relations. The next seven years of bull market yielded productive talks but no lasting peace. As late as January 30, 2000, the Houston Chronicle reported that the tide of history was moving the Mideast toward peace.

In reality, however, the tide had already reversed. In July 2000, the same paper would mark the moment by reporting, Syrian-Israeli peace negotiations have been frozen since mid-January. The exact date of the freeze was January 11, three days before the Dows all-time high. By last summer, the anxiety level was clearly rising fast as the Palestinians threatened to declare statehood and another peace conference failed to produce a breakthrough for the first time since 1993. As stocks entered their September-October swoon, Palestinian sections of Israel exploded in a continuous wave of rioting. In December, this headline evidenced the depth of anger: As Arafat Embraces Revolt, His Sagging Popularity Rises. Israel responded with the election of hardliner Ariel Sharon. In the first half of May 2001, the situation bordered on open warfare. Is It War Yet? asked one headline on May 20. On May 21, the Bush administration criticized Israel for using U.S. supplied warplanes against Palestinians for the first time since the 1967 war, which was a year after the peak of Cycle III . Finally, on May 22, the day of the Dows secondary high, there was a glimmer of hope as Sharon talked of compromise and ordered Israeli forces only to return fire if shot at.

Past signals have usually come at and after long term turns, although the 1967 outbreak was followed by a run that almost made a new high in 1968. Given that precedent, perhaps the unfolding crisis in the Mideast does not preclude a new high in the Dow. If the Dow goes to a new high, the conflict may ease briefly, but a historic sell signal for the stock market has clearly been issued by the open warfare. The Mideast s record as an early register of negative social mood suggests that a major bear market and thus the trend toward global hostility has only just begun.

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