A Look Forward to Those Events Scheduled for Next Week

October 12, 2009

Danger Signs

Dividend Disturbance

Edited by ROBIN GOLDWYN BLUMENTHAL

A look forward to those events scheduled for next week.

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DESPITE THE INCREASING CAPITULATION (or perhaps because of it) among bears to the idea that this market is unstoppable, there are some real danger signals. That's the view, at least, of Robert Prechter, president of Elliott Wave International, a market-timing permabear who said a market low was being formed in February.

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.

Prechter doesn't know what might trigger a market swoon, although he thinks it will be "at least as large" as the 60% drop from October 2007 to March 2009. His prescription? Short-term Treasury bills and gold.

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