Richard Russell:
www.dowtheories.com
>>This bear market, so far, has been the ultimate killer of formulas. It's been the death of accepted methods and conventional wisdom. If you worked on a time-tested formula for making money in the market, you've probably had your head handed to you over the past three years.<<
>>I've never in my 55 years of watching markets, seen a decline of this magnitude end without it producing at least a few panic-downside days.
Sure, "this time is could be different." This time this huge decline may end with a complacent "whimper," but I want to see it. I would at least, at the very least, want to see up upside breadth-thrust if this market is going to reverse to the upside without a preceding panic.
At any rate, what I want to say is that this is a time to be totally open to the unexpected, but it's also a time to be very skeptical. Can the market reverse to the upside from a complacent, no-panic low? I'm very doubtful, but we'll see.<<
October 7, 2002 -- The world is at, or moving toward the crossroads. You can sense it in the Brookman piece that I included at the tail-end of Saturday's site. You can sense it from the e-mail that I have included at the end of today's site.
Mighty forces are stirring. America the Beautiful may be on the way to becoming America the World Policeman or perhaps America the International Strategist. Or this brutal bear market may turn us into America the Basket Case.
I'll be honest, I don't know how it's all going to turn out. But I do know this -- America cannot live forever with a chronic current account balance. American power cannot stand forever when America depends on $1.5 billion coming to these shores every day from its "foreign friends."
I deal with markets. I believe in markets. People lie. Politicians lie all the time. Economists, for the most part, live in Ivory Towers and have little experience with the actual markets -- so I always take what economist say with a "grain of salt."
All economics comes down to the flow of funds. In the vernacular they say, "You want to know what's going on? Then follow the money." That's right -- FOLLOW THE MONEY. You better believe that tells you what's going on. My business, what I write about, has largely to do with following the money.
I love markets, because I love the truth and I hate lies and I hate euphemisms. Markets don't lie. Markets are fair game, and in the investment business what you are really doing it trying to understand what the market is saying and where the money is going. So when you read Richard Russell, you are really on the same path that I am on. I seek to understand the language of the markets. Another way of putting it is that I
FOLLOW THE MONEY.
If you become skillful at following the money, there are many bonuses. One bonus is that learn what's REALLY going on in this world of ours. A second bonus is that you can make money for yourself, and money means freedom and money means being able to do what you want, buy what you want, go where you want. Money is power, and the pursuit of power is what runs politics and it's what runs CEOs, and it's what's behind most businesses.
A powerful politician is a successful politician. A powerful CEO is a successful CEO. A powerful business is a successful business. Power in America is a product of either brains or intuition or charisma or daring or -- money.
OK, on to the markets. This is no time to be a wise guy in the investment business. You may not believe in cycles, but a lot of intelligent people do. I think cycles are interesting, a lot of the times they "work," but like everything else having to do with market methods, you can't depend on them. They don't work all of the time. And as I've complained over and over at critical junctures, "Damn it, where are they when you need them?
Right now the cycle crowd is telling us that there's a 20-year cycle that will hit its low around October of this year, which means now -- the last 20-year cycles lows struck in 1942, 1962 and 1982. Presumably the next one should hit in 2002, and that's great (if it works) for the bulls.
According to my good friend and cycle-expert Ken Gammage of "The Richland Report," there is a "nesting" of cycles that should hit bottom around now -- these are the 20-week cycle and the Hurst Nominal Cycle.
Then we have the famous Presidential Cycle (the pre-election cycle) which is a four-year cycle. This cycle hits its low somewhere in the two years prior to the actual presidential election. This means 2002 or 2003 for the Presidential cycle bottom. This cycle has "worked" during every pre-presidential election except during the bear market period of 1930-32.
Finally, just about everybody knows that there is a "good" six months for investing and a "bad" six months. The "bad" six months is almost behind us, and it should be finished around the end of November. From the end of November to May we have the "good" six months, and this six month period is the one in which most of the money is made. In fact, if you had invested only during November to May, you would have done very well over the years.
Of course there have been exceptions. And it's those exceptions that kill you!
This bear market, so far, has been the ultimate killer of formulas. It's been the death of accepted methods and conventional wisdom. If you worked on a time-tested formula for making money in the market, you've probably had your head handed to you over the past three years.
But again, I say (and I'm talking to Richard Russell too), this is no time to be a wise guy.
A lot of material, particularly cycle studies, tell us to be watchful of a bottom, at least a temporary bottom, around now. Furthermore, this market is extremely oversold. Finally, this market has declined for six months in a row, six consecutive weeks, and its on its way to a rare three consecutive years down.
This year looks to be a down year. To my knowledge, the market has never been down four years in a row. I'm not saying that it can't happen, but that implies the somewhere ahead, either later this year or somewhere next year, we'll hit a bottom, and that next year "should" be an up-year. If not, we're facing a real disaster.
To sum up, an lot of "conventional" items suggest that we should hit a temporary bottom somewhere between now and the end of the year. Would I stake my money on it, would I try to jump the gun and buy here? I would not.
Despite the extreme oversold condition of this market, despite the "cyclical" indications in this market, one major item bothers me. It's a missing item. And this is it -- WHERE'S THE FEAR? WHERE'S THE PANIC? WHERE ARE THE 90% DOWN-DAYS?
I've never in my 55 years of watching markets, seen a decline of this magnitude end without it producing at least a few panic-downside days.
Sure, "this time is could be different." This time this huge decline may end with a complacent "whimper," but I want to see it. I would at least, at the very least, want to see up upside breadth-thrust if this market is going to reverse to the upside without a preceding panic.
At any rate, what I want to say is that this is a time to be totally open to the unexpected, but it's also a time to be very skeptical. Can the market reverse to the upside from a complacent, no-panic low? I'm very doubtful, but we'll see.
In the meantime, I'm keeping my powder dry. I don't gamble. I've never gambled. And I won't gamble on this market bottoming out on the basis of cycles or the presidential cycle or any other pre-destined method. If this market is going to turn around without panic action first, then I'm a Californian from Missouri -- it could happen, but "SHOW ME."
I want to draw attention to two items. The first is the resistant Transportation Average. This Average recorded a low of 2033.86 on September 20, 2001. The Dow is well below its September 2001 low, but so far the Transports have not confirmed.
As I interpret the Dow Theory, this is the biggest plus in the price structure. I have asked my subscribers to keep their eyes focused on that 2033.86 low of September 20, 2001.
I went through the 20 Transports over the weekend, and it's clear that it's the truckers and the rails that have been the strength of the Transportation Average. Nine of the 20 Transports are still positive or holding, including CNF Transportation, Fedex, SB Hunt Transports, Norfolk & Southern, Roadway Express, Ryder System, Union Pacific, and Yellow Corp.
This morning the Transportation Average showed signs of weakness with that Average down 58 points earlier in the day, putting the Trannies only 47 points above their 2033.86 September 20, 2001 close. If the Transports close below 2033.86, thereby confirming Industrial weakness, I would take it as a bearish indication and a reconfirmation of the primary bear trend.
The second item I want to talk about is the VIX or implied volatility index. The VIX, very basically, is the option-sellers' estimate of the forthcoming volatility in the market.
At the July 23 low, the VIX surged to a high of 50.5. At that stressful time. option-writers were protecting themselves against expected high-volatilty in the market.
The amazing thing is that as of last Friday, the VIX was at 48.9. In other words, option-sellers were thinking that the Dow would be extremely volatile in the days ahead. The higher the VIX, the more option-sellers will charge both buyers of puts and buyers of calls.
My point is that right now the very sophisticated option-writers (sellers) believe that the market will be very volatile in the days ahead. Most reporters think that a high VIX is bullish since it implies fear. This is not correct. A high VIX tells us that option-writers are protecting themselves against high volatility (usually, but not always, on the downside).
So let me put it this way -- the very savvy option-writers are very nervous at this time, and they want to protect themselves. And the VIX measures the degree of their nervousness.
TODAY'S MARKET ACTION -- The "death by a thousand cuts" continues. More attrition, more pain, more new lows -- but still no panic, just more losses across the board.
My PTI was down 6 to 5206 with the 89-day moving average at 5248. PTI broke to a new low today. I thought this new low would set off some kind of big break or panic. Didn't happen. The PTI remains in its bear mode.
The Dow was down 105.42 to a new bear market low of 7422.98. There was one mover, MMM down 3.62 to 110.88.
Nov. crude was up .02 to 29.61.
Ah, the Transports -- they were down 70.11 to 2058.57. This leaves them only 24 points above their September 20, 2001 low of 2033.86. If Transports close below that figure, then under Dow Theory this primary bear market will be reconfirmed.
The Utilities were down 3.88 to 197.12. ED and SO continue to be standouts for strength. TXU and AEP are disasters.
There were 728 advances and 2512 declines. Upside volume was 261 million and downside volume was 1.28 billion. Downside vol. was 83% of upside + downside volume so this was NOT a 90% downside day.
Total NYSE volume was 1.56 billion shares.
New highs shrunk to 39 while new lows surged to 505. My High/Low index dropped to a new low of minus 6022.
S&P was down 15.30 to 785.28, breaking to a new low and confirming the Dow on the downside.
Nasdaq was down 20.07 to 1119.83, a new bear market low -- volume was 1.39 billion shares.
My Big Money Breadth Index was down 4 to 699, a new bear market low -- Big-cap stocks continue to lead this market due south.
Dec. Dollar Index was down .06 to 107.97. Dec. euro was up .27 to 97.86. Dec. yen was down a large .73 to 80.70.
Dec. Nikkei was down a 105 to a sickening new bear market low of 8630. Japan deep in deflation and recession.
Bonds continue to trade near their highs. Dec. long T-bond up 10 ticks to 133.30 to yield 4.73%. Dec. 10 year T-note up 11 tick to 115.23 to yield 3.68%. Dec. muni futures up 7 ticks to 110.08.
Dec. gold down .20 to 323.10. Dec. silver was down 4 to 4.45. January platinum was down .40 to 556.50. Dec. palladium was down .50 to 315.50.
Gold/Dollar Index ratio was up .15 to 299.44 and holding above it 50-day MA which stands at 292.90.
But XAU down 2.27 to 64.78 and HUI down 4.24 to 115.19.
Why are the gold share acting poorly when gold is acting well? My explanation is that gold shares are still common stocks and they are affected by the rest of the market but not to the same extent. This seems counter-intuitive, but it's happened before. Ultimately, gold shares will follow gold, but at this point there's nervousness about ALL common stocks, and gold shares are still common stocks.
The rising 200-day MA for HUI stands at 107.00 and the rising 50-day MA for HUI stands at 122.40. But HUI is above its 200-day MA but below its 50-day MA and graded neutral. If Dec. gold can rally and hold above 325 that should put a floor under the gold shares. Remember, the majority of all investors are still skeptical about both gold and the gold shares.
NEM down .59, PDG down .40, ABX down .31, AU down .99, AEM down .74, HL up .41.
STOCKS -- My Most Active Stock Index was down 5 to a new bear market low of 161. This Index has been terrific in showing the way, or I should saying leading the way.
The 15 most active stocks on the NYSE were -- GE down 1.06 to 22.95 (you got out just in time, Jack), EMC up .32, C down 1.25, AOL down .61 (troubles, troubles), JPM up .23, PFE down .25, MO up 1.99, HD down 1.59, TYC down .91, TXU down 4.40 to 22.64 (stock was 48 a few months ago), WMT down 1.40 (you never like to see this one go down), XOM up .13, SGP up .50, DIS down .91 to 14.14 (big guns on the board want to jettison Eisner), S (no, not my beloved Sears) down 5.39 to 32.25.
More -- Do we really need more? SO up .68, ED up .02, MWD down 1.27, MER down 1.74, FNM down 1.45, FRE down 1.35, CSCO down .38, EK down 1.00, MSFT up .35, DELL up .19, GM down .34, DCX down .52, GS down 2.52.
McClellan Oscillator plunging down to a minus 190. Oscillator very oversold, but it has a downside breakaway look that I don't like Be VERY CAREFUL, this is one very angry bear.
CONCLUSION -- This is becoming one of the nastiest bear markets I've ever dealt with. I note in today's NY Times that one columnist is wondering whether what we're seeing is simply an unwinding of the "bubble" or whether it's going to impact on the economy. At first I thought he was kidding. He wasn't.
Believe me this bear market is going to impact on the economy. The market has already wiped out roughly $8 trillion in investor's values. The yearly Gross Domestic Product of the US is about $10 trillion. When you've wiped out 80% of an entire year's GDP, well yeah, I'd say it's going to impact on the economy.
I don't sense that the mutual funds are selling yet. As the bear claws the market and drives it lower, the funds will be forced to sell. This will be a true horror. I don't hear any talk of margin calls. Is there a cone of silence enveloping Wall Street?
Well, it's all very eerie, but somewhere along the line I expect the truth to emerge regarding what's really happening.
One thing I believe is happening is that people are getting angry at Bush and his daily haranguing and venting about Saddam Hussein. People are starting to complain, "Bush, get off it, you're spending too much time on Saddam and in the meantime the US stock market and the US economy are falling apart."
I personally get the feeling that Bush has somehow "lost it." I know a lot of people don't agree, but his timing and his ferocity and his obsession strike me as really strange.
Yeah, I know that Saddam tried to kill your daddy, but be careful Bushie-man, I just don't get a good feeling about the whole picture. And if the stock market continues to do what it's doing, then Mr. Bush, you are going to have your hands full. And I mean you're going to have to deal with a very unhappy United States population.
Here's my advice to you, President Bush -- this is the time to follow the money and note well where it's leading.
There are critical practical and philosophical debates and arguments going on in the US regarding what we are doing and where we are going and whether we can afford the strategies put forth our leaders in Washington. Below is a very important and scholarly answer the Brookman piece that I included in Saturday's site. The piece below is a long piece, but the subjects being debated here are absolutely critical. If you really want to know what's going on, read the Brookman article on Saturday's site and read the brilliant article below.
Pax America? The American Empire? Policeman to the world? We'll see -- Richard Russell
Subject: Jay Bookman Article
Dear Mr. Russell:
Thanks for the web cite for Jay's article. Jay is too bright an
individual to have missed the point so completely. Therefore, I have to
assume he intended to misstate.
An empire, such as Rome, conquers and rules in its own name and under
the laws of the empire. Pax Romanus was a set of civil laws which went
on to become the basis of European law (civil law as opposed to
precedential law as developed in England and English speaking
countries). The empire owns the territories and obtains tax revenues
from these countries to pay for the occupation and administration of the
conquered territories.
England's empire ran in much the same way all
over the world. This is, at best, a mercantilist view of the world and
world trade. At worst, it is outright plunder and tyranny, as was
imposed by Spain the New World.
Bush and his foreign policy team see the world quite differently. The
differences are philosophical, political and economic. They stem from
the writings in the Council for Foreign Relations and the Trilats.
Rather than mercantilism, which is centrally controlled and inflexible,
the CFR and T/L people see the world much as Adam Smith once saw the
English countryside. They want to encourage economic expansion in all
countries, so that trade will flourish.
By creating jobs in poor countries, such as the Philippines, Malaysia, Indonesia, and China ( and
earlier in Korea, Japan, Singapore and Taiwan), one gets low cost
goods. This benefits developed countries in the west, initially in low
cost textiles, crafts, etc. However, as countries develop their work
forces, more value added labor can be applied to manufacturing simple
and then complex items. Thus, the labor force starts the process of
stratification, leading to a more affluent set of layers closer to the
top--both in the sense of management and skilled labor. This, in turn,
creates local forms of consumption.
Singapore, Korea and Japan were examples of war-torn economies without
any hope of expansion. The CFR theory changed that. (By the way, no
need to get into the Taylor Caldwell conspiracy theory at this point).
Then, we got the 5 Tigers. Now we have China. China is moving into
stratification very quickly.
I have been a guest teacher at Harvard
Business School since 1987. Initially, I say classes made up from US
(majority), with the rest coming from Europe and Latin America. Last
year, most of the international students were Asian, with China heavily
represented. China is made up of two main factions--the military
hardliners who are distrustful of the west from the experience with 19th
and 20th Century concessions; and the civilian leaders who recognize
what the CFR preaches economically. China is fast becoming the world
banker and the world manufacturer for everything from textiles to high
tech computers, cell phones and telecom gear. For example, Cisco had 32
plants 2 years ago and only one was in US.
Other than military gear, we
will be dependant on China for just about everything very soon. Even
TSM is getting Taiwan government permission to open semi plants in
China. Oh, yes, they will start with smaller wafer size and wider chip
widths, but soon even that will change to state of the art.
China is developing managerial expertise, skilled labor, semi-skilled
labor and entry labor categories in the fringe communities along the
coast. But soon, after the Yangsee river is developed for inland sea
travel by large ships, the sites of manufacturing will change. Cell
phones and computers are now spreading quickly in China, as a more
affluent society can afford consumer goods. The Chinese software
industry is now flourishing, after China realized that piracy had to be
eliminated if they wanted this industry to grow internally. China has
realized the futility of using war in a mercantile sense to conquer
other countries for plunder and trade. The administration is too
costly; and holding rebellion in check is too hard on the homeland
military personnel. They learned this lesson from the west--from the
CFR writings.
So if they learned that lesson from us, what is the Bush administration
really saying? Because they all are CFR members. Their view is that
world trade cannot flourish where the risks of international commerce
are too high. If the Philippines is too unstable, it cannot be a
manufacturer nor a consumer. Ditto Malaysia, Indonesia, etc. In all
these countries, the Tongs (the ethnic Chinese families) control most of
the trade. Eventually, as we solve the internal Chinese conflicts and
limit the old military thinking, the CFR believe that China will patrol
the Far East, balanced by India as a major source of trade and technical
innovation.
Japan has neither the will nor the aptitude for local
enforcement of international law. And clearly the third-world, marxist
dominated UN is an abject failure at all levels. Terrorism dominates
many far east and middle east countries. The west cannot afford to
write them off as markets or sources of raw materials or manufactured
goods. And time will not permit the nations of the world to figure out
how to create some other multi-national force to replace the UN. So we
will fill the breach, until some better idea appears. Economic trade is
at issue. Iraq is hated by its neighbors, so it is a good target. How
fast depends upon whether we guarantee French and Russian interests will
be protected. Former Sen. De Concini was quite frank on this point in a
recent interview with Greta S. on Fox News.
Sorry this is long, but we are NOT trying to extend American military or
economic interests via these military actions. Rather, like the
Crusades, we are trying to keep the routes of trade open and to keep the
nations of the world consuming and creating. You, of all people,
understand what this means economically. If we were to allow the world
to disintegrate, even around the margin of trade, it would have
immediate, negative impacts on OECD economic numbers. Europe, the US
and Japan would fall quickly into depressions.
I am not an internationalist. I am not desirous, for any reason, for
the US to become the world's policeman to maintain the status quo. I
would rather live a more simple, rural life than to take the risk that
this type of intervention carries with it. But we have been going down
this path for many years. This is merely a twist on an older theory.
Where do we stop? How much economic pain can we endure? I think that
the younger generations are too sybaritic and pampered to endure much in
the way of materialistic indulgence.
You lived through tough times. Your parents lived through the
Depression. So did mine. We see things differently. We save, even if
the Fed turns our 1930 silver dimes and quarters into worthless 2002
paper. We eat carefully, buy sparingly--not based on what we can afford
but on what we really require. We like to read and think. We want to
be friendly to our neighbors but cherish our privacy. We make money by
giving value to others, not by stealing it. Enron is merely the extreme
of the lack of morality that we have been suffering since the '60's.
Ethics has replaced standards. Ethics is a subjective state. Standards
are objective. Compliance systems are hard boundaries, like barbed wire
fences. Ethics are touchy-feely systems that vary from person to
person. We are not even attacking the right problem in today's
discussions. I have created compliance systems and have taught about
them. Other than GE, I know of no company that really has adopted
boundary systems from top to bottom.
But I digress. The attention span of the public and its ability to
endure hardship is small, maybe even minuscule. So, tell me, what are
our options, if we want to hold the country together? When you look at
this problem from the global point of view, the US has to keep selling
Coke. They have to keep the crap tables open and running. If they
don't, small countries go up in smoke and large countries go into a
medieval depression. Not a pretty sight to contemplate.
As I say, Jay misstated the real issues and what the new doctrine says.
I still disagree with the new doctrine, because I am willing to live
with less. I doubt many others would be so willing, if the alternatives
were starkly laid out in front of them. Dear Mr. Russell, you are wise
and caring and giving, beyond that of most men. You understand how we
are teetering on the brink. Just as the Fed will do everything in its
power to hold off deflation, so the CFR international crowd will do all
in its collective power to keep international trade alive. We are
caught in the conundrum of seeing what must be done and knowing that
most of our allies don't have the courage of their convictions. We can
either act unilaterally or watch the downfall of the developed world.
It really is the end of Camelot in many ways.
As always, my best to you and your family. May you all be spared any
harm. John V
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