May 15 (Bloomberg) -- Robert Prechter, known for examining stock charts to make market forecasts, says dividend payouts, the ratio of share prices to earnings and dwindling cash at mutual funds mean U.S. equities may plunge as much as 80 percent.

The 43 percent drop by the Standard & Poor’s 500 Index since October 2007 hasn’t taken prices to levels typical of the beginnings of bull markets, according to Prechter, the founder of Elliott Wave International Inc. who advised shorting U.S. stocks three months before the market peaked.

“Have we fallen far enough on this to say that the bear market’s probably over?” Prechter, who expects the stock market to lose half to four-fifths of its value, said at a meeting of the Market Technicians Association in New York yesterday. “On our model, there should be more to come.”

Prechter, the 60-year-old advocate of a theory of market analysis developed by accountant Ralph Nelson Elliott during the Great Depression, achieved fame in 1987 for predicting that year’s crash two weeks before it occurred. He’s published a monthly newsletter, The Elliott Wave Theorist, since 1979.

Stocks are likely to decline because of current dividend yields, valuations and mutual fund cash holdings, Prechter said at the meeting at the headquarters of Bloomberg LP, the parent of Bloomberg News. Technical analysts such as Prechter make predictions based on patterns in price and volume charts.

The dividend yield for the 30 stocks in the Dow Jones Industrial Average is too low at 3.71 percent, he said, citing an analysis of prior market peaks in 1929, 1966 and 1977.

‘Long Way to Go’

“We have a long way to go to where the market may be at bear-market-bottom yields,” he said.

Valuation measures including price-to-earnings, price-to- book value and bond payouts relative to dividend yields are also still too high based on historical averages, Prechter said.

The price-earnings ratio on the S&P 500 was about 60 at the end of last year, based on 2008 profits, according to data compiled by S&P. In prior bear-market lows, the measure sank to 6 or 7, Prechter said.

“That gives you a flavor for how much the market’s going to have to come down, or earnings will have to suddenly soar,” he said.

There are different measures of the price-to-earnings ratio. Yale University Professor Robert Shiller tallies the figure using 10 years of profits to smooth out short-term fluctuations. His current reading is about 15.7, near the historic average of 16.3 going back over the past 128 years, according to data on his Web site. Shiller’s P/E ratio got as low as 5.6 during the Great Depression.

Three Steps Forward

Elliott Wave Theory holds that market trends follow a predictable, five-stage structure of three steps, or waves, forward, two steps back. In addition, the waves share a variety of features: Wave two never falls below the starting level of wave one; wave three is never the shortest; waves one and five tend to be of equal length; and wave sizes are often related by a series of numbers known as the Fibonacci sequence, wherein each number is based on the sum of the two previous ones.

Prechter, the author or editor of 13 books on forecasting, also argues that markets are fundamentally driven by social psychology. The current trend toward saving and avoidance of debt is leading to an economic depression and deflation, he said.

Mutual fund managers have less than 6 percent of their assets in cash, another indication that there isn’t enough buying power to sustain a long-term rally in stocks, Prechter said. Stock fund managers had 5.6 percent of their assets in cash as of March, according to the Investment Company Institute.

Based on the amounts of cash fund managers had at the start of bull markets in 1974, 1982 and 1990, “we should be expecting double-digits for a really good bear-market bottom,” Prechter said.

To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net.

Last Updated: May 15, 2009 08:38 EDT