Oct. 5 (Bloomberg) -- U.S. stocks may suffer a “major decline” after climbing to the highest levels in almost a year two weeks ago, according to Robert Prechter, founder of Elliott Wave International Inc.

The Standard & Poor’s 500 Index will probably fall “substantially below” 676.53, the 12-year low reached on March 9, he said. The measure surged as much as 58 percent to 1,071.66 in the ensuing seven months on signs the recession is ending. His projection implies a drop of more than 34 percent from last week’s close. Technical analysis, Prechter’s field since 1975, involves making predictions based on price and volume history.

“Stocks are very overvalued,” Prechter, who advised betting against U.S. equities three months before the market peaked in October 2007, said in an Oct. 1 telephone interview. “Stocks peaked in September and are back in a bear market.”

Prechter’s forecasts have had mixed results. While the former rock-and-roll drummer achieved fame for predicting a stock market crash two weeks before Black Monday in 1987, his standing suffered in the 1990s because he missed the almost decade-long bull market. In December 2002, he said the Dow Jones Industrial Average would fall below 1,000. It hasn’t dipped below 6,000 since then, climbing 25 percent in 2003 and then another 35 percent through Oct. 9, 2007.

Manufacturing, Employment

U.S. stocks fell last week, giving the S&P 500 its first two-week decline since July, after manufacturing expanded less than anticipated and unemployment climbed to a 26-year high, spurring concern the economy is rebounding slower than forecast.

The S&P 500’s seven-month advance pushed its price-to- earnings ratio to the highest levels since 2004. The measure was valued at 20.2 times its companies’ reported operating profits on Sept. 22, according to Bloomberg data.

Prechter, 60, said he’s basing his prediction for a decline on chart patterns, dividend yields and extreme levels of investor optimism. The combined dividend yield for the 30 stocks in the Dow Jones Industrial Average is too low at 2.94 percent, he said, citing an analysis of the 1929 market peak.

“Stocks are still in the most expensive area in history,” he said.

Investors Intelligence’s analysis of investment newsletters last week showed 50.6 percent of writers were bullish. That’s near the level for the week through Aug. 25, when the majority turned bullish for the first time since December 2007.

Wave Theory

Prechter is an advocate of the Elliott Wave Theory developed by accountant Ralph Nelson Elliott during the Great Depression. Elliott concluded that market swings, or waves, follow a predictable, five-stage structure of three steps forward, two steps back.

Nouriel Roubini, the New York University professor who predicted the financial crisis, agrees with Prechter that stock and commodity markets may drop in coming months as the gradual pace of the economic recovery disappoints investors.

“Markets have gone up too much, too soon, too fast,” Roubini said in an interview in Istanbul on Oct. 3. “I see the risk of a correction, especially when the markets now realize that the recovery is not rapid and V-shaped, but more like U- shaped. That might be in the fourth quarter or the first quarter of next year.”

Stocks, commodities and real-estate will suffer from a rebound in the U.S. dollar, Prechter said.

“I’m very bullish on the dollar,” he said. “There’s extreme pessimism, and that usually marks a bottom.”

The Dollar Index, uses to track the currency against those of six major American trading partners, dropped to 76.05 on Sept. 23, the lowest level in more than a year.

To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net

Last Updated: October 5, 2009 07:45 EDT