The Bear Market and Depression: How Close to the Bottom?

Here is an excerpt from the EWI
Independent Investor eBook, which answers the question:
How close to the bottom are we?
* * * * *
Originally written by Robert Prechter for The Elliott Wave Theorist, January
2009

Some people contact us and say, “People are more bearish
than I have ever seen them. This has to be a bottom.” The
first half of this statement may well be true for many market
observers. If one has been in the market for less than 14 years,
one has never seen people this bearish. But market sentiment
over those years was a historical anomaly. The annual dividend
payout from stocks reached its lowest level ever: less than half
the previous record. The P/E ratio reached its highest level
ever: double the previous record. The price-to-book value ratio
went into the stratosphere, as did the ratio between corporate
bond yields and the same corporations’ stock dividend yields.

During nine and a half of those years, from October 1998 to
March 2008, optimism dominated so consistently that bulls outnumbered
bears among advisors (per the Investors Intelligence polls) for
481 out of 490 weeks. Investors got so used to this period of
euphoria and financial excess that they have taken it as the
norm.

With that period as a benchmark, the moderate slippage in optimism
since 2007 does appear as a severe change. But observe a subtle
irony: When commentators agree that investors are too bearish,
they say so to justify being bullish. Thus, as part
of the crowd, they are still seeking rationalizations for their
continued optimism, and one of their best excuses is
that everyone else is bearish. This would be reasoning, not rationalization,
if it were true.

But is the net reduction in optimism since 2000/2007 in fact
enough to indicate a market bottom? For the rest of this issue,
we will update the key indicators from Conquer the Crash that
so powerfully signaled a historic top in the making. When we
are finished, you will know whether or not the market is at bottom.

Figure 1 updates our picture of Supercycle and Grand Supercycle-degree
periods of prosperity and depression. The top formed in the past
decade is the biggest since 1720, yet, as you can see, the decline
so far is small compared to the three that preceded it. There
is a lot more room to go on the downside.

Figure 2 updates the Dow’s dividend yield. Over the past nine years,
it has improved nicely, from 1.3 percent to 3.7 percent, near its level at
previous market tops. If companies’ dividends were to stay
the same, a 50 percent drop in stock prices from here would bring the Dow’s
yield back into the area where it was at the stock market bottoms of 1942,
1949, 1974 and 1982. But of course, dividends will not stay the same.

Companies are cutting dividends and will cut more as the depression deepens.
So, the falling stock market is chasing an elusive quarry in the form of an
attractive dividend yield. This is a downward spiral that will not end until
prices get ahead of dividend cuts and the Dow’s dividend yield goes above
that of 1932, which was 17 percent (or until dividends fall so close to zero
that the yield is meaningless).

Get the whole story about how much farther we have to go to a bear-market
bottom by reading the rest of this article from EWI’s Independent
Investor eBook. The fastest way to read it AND the six new chapters in EWI’s
Independent Investor eBook is to become a member of Club EWI.