Thursday, January 14, 2010

Negative Indicators vs. the Bull Rally

For what it's worth, the stock market sentiment indicators that I watch are as optimistic as they've been for at least a couple of years. Normally this forecasts a drop in stock prices, but as I've said before, the current bull market rally has not been reacting normally to sentiment since it began in March of last year.

There are additional longer-term factors which forecast a drop in prices as well. First, the dividend yield of the S&P 500 is still hovering around 2%, and the market would have to fall ~30% to 60% from here in order to return to an historically normal yield. Second, 2010 is a midterm election year, and such years typically underperform the other three years in the four-year presidential election cycle. Finally, I think there's still a long way to go before our national debt issues are resolved and economic growth turns positive in a sustainable way. For instance, monthly state tax revenues are continuing to shrink, and that's a pretty reliable means of measuring taxable economic activity.

1 comment:

John said...

Have you seen this site?:

It does a nice job of showing data trends. I will be surprised if the market doesn't correct down significantly. The question is when. Looking at Japan's post bubble rallies, it could be a year or two before the S&P corrects its current rally. In fact, I'll be surprised if the current rally doesn't continue this year. However, I'm not certain enough of the continued rally to be long at this time. I'm happy to sit on the sidelines.
The firing range is a kick, pun intended. I've shot a .44 and a .357. Very fun.