Just How Overbought Is This Market?

By Lawrence G. McMillan

If there wasn’t such incessant media coverage today, one might have a somewhat different opinion of what’s happening in the current market.  I say this with some degree of experience, having seen the early 1973 market firsthand.  In early 1973, the Dow (which was all anybody really used as a broad index measure back then) was making new all-time highs, shortly after the incumbent President had been elected, corporate earnings were good, interest rates were low (not as low as they are now, though), stock volume was low (listed options were introduced in April 1973, but their volume was not significant), and the two previous nasty bear markets (1966 and 1968-1970) were fading in traders’ memories.  The parallels to the current market are obvious.

A major difference, however, was that there was no financial television back then, save for an occasional weekly show.  So one relied on the Wall Street Journal or Barron’s or private newsletters for market opinion.  The former two were uniformly bullish all the time, so there wasn’t much to be gleaned from them.  Although I do recall that the Barron’s Investment Roundtable – their annual market forecast panel (which is still a feature of that publication) –  entered 1973 with the headline “Not a bear among them.”  Even Alan Abelson (Barron’s now-perennially-bearish columnist) was bullish in those days.

For those of a contrarian bent, it was easy to see that a top was forming, for it seemed that the only bears were a few newsletter writers.  The third – and nastiest – of the three bear markets began in 1973.  This is something that we have pointed out in our annual forecast issue for some time (most recently in Volume 21, No. 24).

Today, while many of the same conditions exist, one gets the feeling that there are a lot of bears – perhaps too many for a valid top to be forming.  But are there really, or are there just so many media outlets needing to fill air time that they drag out these bearish analysts to debate the growing number of bullish analysts?  This is why it’s important to shut out the meaningless drivel and rely instead on valid indicators...