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

July 12,
2010

By Elliott
Wave International

While many people spend time yearning for the financial
markets
to turn back up, a rare few have looked back in time to
compare
historical markets with the current situation – and
then
delivered a clear-eyed view of the future informed by
knowledge
of the past. One who has is Robert Prechter. When he
thinks
about markets and wave patterns, he goes back to the
1700s, the
1800s, and — most tellingly for our time now — the
early 1900s
when the Great Depression weighed down the United States
in the
late 1920s and early 1930s. With this large wash of
history in
mind, he is able to explain why he thinks we have a long
way
to go to get to the bottom of this bear market.

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.