Nasdaq: Long-Term Optimism vs. Long-Term Pessimism

The blue line is for the optimists. The exponential trend line simply reflects a return to business as normal. As seen in the following link, the Nasdaq is still firmly convinced that the Nasdaq is a good investment long-term.

Nasdaq.com: Bear Markets Create Opportunity

Despite the recent devastating global bear market, there is no doubt in my mind that we are simply going through another cycle. Mind you, I did not say just another cycle. This cycle has been extraordinary. Right now, the overwhelming belief is that equities are dead. Even during the most powerful rally in more than 70 years—nearly a 40% rally off the March 2009 low—most believe that this is nothing more than a bear market rally.

The red line is for the pessimists. In spite of the "most powerful rally in more than 70 years" the 10-year moving average is continuing to roll over. Go figure.

Danger Signs

Consider the dividend yield -- the annual dividend divided by stock price. The yield for the Dow Jones Industrial Average has fallen from 4.7% on March 9 to 2.95%, about the same as in September 1929 -- and lower than at all other stock-market peaks of the 20th century, writes Prechter in his most recent report. With the dividend yield so low, "people are too optimistic about making capital gains," Prechter says. "When dividend yields are low, it has always indicated a market top," he adds.

But that isn't all that gives Prechter pause. At the end of July, mutual-fund cash holdings stood at 4.2% of assets, not much higher than the all-time low of 3.5% at the July 2007 stock-market high.

Moreover, sentiment readings have gone bullishly haywire -- a notably contrarian signal. Prechter, who predicted both last year's major decline and the 1987 crash, and who is issuing an updated version of his 2002 Conquer the Crash later this month, notes that the Daily Sentiment Index reported by MBH Commodities recently hit 92% bullish, compared with just 2% at the March low.

I'd like to think that I'm neither an optimist nor a pessimist. That said, I'm leaning very heavily towards the pessimist arguments. It certainly wasn't the "overwhelming belief is that equities are dead" that managed to rally the stock market the most in 70+ years. I can tell you that much. Somewhere, someone must have believed. It surely wasn't me. In fact, it's the only thing that prevents me from investing much of my money in hard assets right now. I respect the damage that yet another deflationary downleg could do.

I've been riding the inflationary/deflationary fence since 2004. No complaints so far! Have I been too pessimistic? Hindsight says otherwise. If anything, I've been consistently too optimistic. I thought our economy would experience serious pain, but the pain that appeared has exceeded my expectations (as seen in the nearly 10% unemployment and rising if nothing else).

Source Data:
Yahoo Finance: Nasdaq Historical Prices